NATIXIS China Offshore Bond Monitor: Credit rally in the offshore market explained not only by the FED but also by the reduced supply

• A dovish FED has pushed down yields in Emerging Market Asia and, even more so, in China’s offshore market. Offshore USD bond yields for Chinese firms fell 96 bps to 5.05% in Q1 2019, which was in line with much improved sentiment. In terms of regulation, reports indicate that China has tightened approval for property developers and local government financing vehicles.
• While the credit rally in the offshore market can be explained by the FED, it can also be attributed to a reduction in supply. In Q1 2019, USD gross bond issuance by Chinese firms contracted 12% Year-on-Year, supporting the credit rally with the above mentioned yield decline of 96 bps to 5.05%. This is demonstrated from a slightly improved sentiment from our big data analysis and is shown through tighter credit spreads between investment grade and high yield bonds.
• A lower onshore yield has reduced the attractiveness of the offshore market for financials. With the People’s Bank of China (“PBoC”) delivering a more lax monetary policy, the offshore-onshore yield spread has narrowed from 151 bps in Q4 2018 to 70 bps in Q1 2019, pushing onshore issuance up by 50% in Q1 2019. While net issuance for both quasi-government and banks remained low, net bond issuances by private companies clearly increased. For the real estate sector, the bulk of issuers rallied with improved sentiment due to expectations of looser regulations. The slight rebound in the value of contracted sales, especially privately-owned developers, has also helped easing some concerns on real estate developers. Meanwhile, their revenue growth still lags behind state-owned developers and is much weaker than in previous years.

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