China’s offshore bond boom has further to run. Companies like Tencent and CNOOC are increasingly turning to international capital markets for financing. Tighter credit on the mainland is a factor – but so is international expansion. Though there are bound to be setbacks, overseas bond issuance should carry on growing.
Last year Chinese companies issued foreign-currency bonds worth close to $58 billion – almost double the amount they raised in 2012. So far this year, issuance is ahead of where it was at the same point twelve months ago. That’s in spite of worries about China’s economic slowdown and the U.S. Federal Reserve’s decision to shrink the bond-buying programme that has kept global rates low.
China’s higher borrowing costs are one factor pushing companies abroad. An established group with a single-A credit rating can currently issue 10-year U.S. dollar bonds with an annual interest rate of less than 4 percent. The same company would probably have to pay closer to 7 percent to borrow on the mainland for the same length of time.
One worry is that cash-strapped corporations are relying on foreign investors to keep their businesses afloat. It’s no coincidence that Chinese property companies, which are largely cut off from bank financing at home, have been the most active issuers of high-yield foreign-currency bonds.
But much of the recent borrowing is financing growing overseas operations. CNOOC, for example, will use part of its $4 billion bond issue to refinance the debt it took on to buy Canadian oil explorer Nexen.
Any bond boom of this scale will inevitably lead to accidents. The yuan’s recent slide against the dollar will squeeze those companies relying on domestic cash flow to service foreign debt. As Chinese companies begin to default on domestic bonds, overseas creditors are bound to share in the pain. Moreover, offshore creditors have fewer protections than their domestic counterparts, which will make corporate collapses even more costly.
Nevertheless, as China gradually removes the distortions from its financial system and Chinese companies continue to expand overseas, the demand for other sources of financing is only likely to grow. The offshore bond boom has further to go.