China Fixed Income 2022 highlights: Key trends and forecasts in China’s offshore bond market

A fall in competitiveness vis-a-vis the onshore market, the disappearance of issuers from the property sector, and the emergence of standby letters of credit (SBLCs), are three key trends observed by Lianhe Global CEO, Stan Ho, across China’s offshore bond market.

He spoke at a session titled China’s offshore bond market: "Review of 2022 and outlook for 2023" as part of FinanceAsia’s fourth annual China Fixed Income conference last week.

“When I first joined the rating agency, I was told that the offshore funding cost was very competitive [compared to onshore funding]. But now, when I talk to potential issuers or bankers, there has been a complete reversal. Because of the market and the policies, it is really far more competitive,” he said.

This trend can be seen across both the investment grade and the high yield markets, he explained.

Ho also noted market impact caused by the mass exit of issuers from the real estate sector, following the property crisis that was triggered by Evergrande Group’s default in the second half of last year.

“The property sector from the issuance perspective is completely gone,” he said, explaining the lack of buyer confidence and absence of liquidity. Both of these elements would need to return before the market could recover.

“I think it will take time,” Ho said, reluctant to share predictions on timelines. However, he noted the execution of tangible measures from the government to support the industry’s access to funding.

Finally, Ho noted the increased popularity SBLCs.

Property developers including government-backed Sino-Ocean Group and Greentown China are among those to have leveraged this credit-enhancing structure in offshore offerings this year. According to research compiled by Bloomberg, Chinese SLBC-backed dollar issuances reached $7 billion in the first half of this year, three times higher than that of the previous year.

Changing dynamics

During the discussion, Ho highlighted the increased difficulty of assessing issuers in China amid ongoing Covid-19 travel restrictions. He stressed the importance of maintaining close interaction with the firm’s onshore analysts in China. “The restrictions have moved all management discussions online, which in my personal opinion, is much less effective,” he said.

He also shared his sense that investment grade corporates, banks, and local government financing vehicles (LGFVs) would be the drivers of Chinese offshore bond issuance in the coming year. He noted that a polarisation and consolidation of LGFVs was also likely.

Questioned by the audience whether he thought the role of rating agencies might change given current market dynamics, Ho said that this would be unlikely from a fundamental perspective, but he acknowledged that more frequent reviews of credit ratings and increased transparency around issuer analysis would help to strengthen the industry.

China Fixed Income 2022 took place on December 6.