Local and foreign banks in China are expected to increase their offshore bond issuance. A new Chinese government policy will boost foreign banks’ offshore bond issuance substantially, while the growing internationalisation of the yuan will encourage Chinese banks to do the same.
Most Chinese offshore issuers are banks. China’s offshore bond market is divided into US dollar bonds and yuan-denominated bonds, commonly called “dim sum" bonds.
“The National Development and Reform Commission (NDRC) will further expand the scale of offshore bond issuance by foreign banks in China, according to economic conditions, to facilitate cross-border financing,” said a November 26 notice on the website of the NDRC, the Chinese government body which regulates offshore bonds.
“The NDRC will also guide foreign banks to improve their offshore debt structure and improve profitability,” it added.
“This announcement is likely to lead to a large increase in offshore bond issuance. Banks tend to be highly rated and have always been the favorites among the investor community,” said Bing Guan, head of China debt capital markets at international law firm Freshfields Bruckhaus Deringer. “This is particularly the case against the backdrop of slowing growth in the real estate and infrastructure sectors.”
One of the motivations for this policy is to encourage more US dollars to be repatriated onshore, which would help build up foreign exchange reserves and stabilize the yuan exchange rate too, he said.
The volume of Chinese offshore bond issuance has declined this year so far.
Proceeds of offshore US dollar bond issuance from Chinese enterprises year-to-date amounted to $147.73 billion, considerably lower than 2017's full-year figures of $202.88 billion, according to Dealogic. In contrast, proceeds from offshore yuan-denominated bond issuance have nearly tripled to $9.43 billion over the same period, compared to $3.22 billion for the whole of last year.
At between $390 billion and $414 billion, China’s offshore bond market is a small fraction of China’s $12 trillion onshore market.
Bloomberg projects that redemptions of US dollar Chinese offshore bonds will surge from $35.2 billion in 2017 to $58.8 billion, $86.6 billion and $94.6 billion in 2018, 2019 and 2020 respectively.
NDRC's announcement can be viewed as part of the Chinese government’s measures to open China’s financial markets to foreign players even further, said Yulia Wan, an analyst in the financial institutions group at Moody’s. The policy will help foreign players expand their funding channels and leverage different markets for liquidity management and businesses opportunities, she said.
Currently, most foreign banks operating in China focus on the cross-border needs of their clients in China or Chinese companies going outside China. “Initiatives that help them provide integrated services to clients generally interest them,” Wan said.
“We see it as one of the necessary steps to internationalize Chinese financial markets on many fronts,” said Judy Kwok-Cheung, director of fixed income research at Bank of Singapore.
More funding channels for Chinese companies will expand the flexibility for the Chinese government to manage the economy including deleveraging. “This could also ease the tight liquidity situation in China,” Kwok-Cheung said.
The NDRC notice gives another reason for this policy: “Every foreign bank must make proper use of proceeds from offshore bonds in accordance with national industrial policies, to increase financing of the real economy and to upgrade China’s industry and help supply-side reform.”
The notice requires that wholly owned foreign banks and Sino-foreign joint venture banks report on their medium to long-term offshore bond issuance plans for next year. They must do so to NDRC branches in the cities of Xiamen, Qingdao, Shenzhen, Beijing, Tianjin and Shanghai, as well as the provinces of Fujian, Guangdong, Yunnan, Jiangsu and Xinjiang. These regions cover most parts of China where foreign banks operate.
In approving these plans by foreign banks, the NDRC will take into consideration how they have used proceeds from their offshore bonds in the past three years.
Offshore bonds provide an alternative financing channel for Chinese issuers, especially those with overseas operations, said Ivan Chung, head of greater China credit research and analysis at Moody’s.
“In 2019, Chinese banks will issue more yuan bonds in offshore markets because this is the Chinese government’s strategy to internationalize the yuan,” said Iris Pang, greater China economist of ING Bank.
In offshore markets, Chinese banks are perceived to be of higher quality than Chinese corporates, so foreign investors are more willing to buy Chinese bank bonds than Chinese corporate bonds, Pang said.
