Chinese companies will increasingly want to hedge their foreign exchange positions and turn to the onshore bond market for funding in the wake of the renminbi's recent sharp losses.
That's the view of fixed income analysts and investors following last week's surprise move by the People's Bank of China to weaken the yuan, which cast an unfavourable hue on the largely unhedged foreign-currency debt issued by Chinese companies offshore.
Dealogic data shows Chinese companies had about $368 billion in dollar-denominated debt outstanding as of August 12.
The PBoC's move triggered the biggest one-day drop in the Chinese currency in two decades and if it weakens further, it could cost Chinese companies much more to pay down these offshore borrowings.
“In the past people thought the yuan would only appreciate, so there’s no need [for Chinese companies] to do any hedging,” Christopher Lee, a managing director of corporate ratings for Greater China at Standard & Poor’s, told FinanceAsia.
“Some large property developers in Hong Kong and in mainland China have a very large currency mismatch…They really have to start hedging,” he said.
According to HSBC, China's property and infrastructure sectors stand out as the most exposed to foreign exchange markets because they have “relatively high” levels of dollar debt. It flagged China Overseas Land and Investment and SOHO China as the two companies with the highest percentages of offshore debt at 82% and 72%, respectively.
Homecoming
At the same time, the renminbi's recent travails could also spur more mainland companies to tap China’s $6 trillion domestic bond market to eliminate the foreign exchange risks, not least in the property sector, which for a time was denied access.
“[Onshore bonds] are issued in [renminbi] and the operational currency of these companies is in [renminbi] too. There’s no mismatch,” Lee said.
Sino-Ocean Land, a large Chinese property developer, said on Monday that it plans to issue domestic corporate bonds totaling Rmb5 billion ($780 million) with an expected maturity of 5 to 10 years and coupon rates of 3.5%-5.8%. According to Moody’s, this issuance will help to lower the developer’s financing costs and strengthen its liquidity.
In its efforts to cool the overheated property sector, the Chinese government for about four years banned real estate companies from raising bond capital onshore. However, with the country’s economy slowing Beijing reopened the market to property firms late last year.
Steve Wang, head of fixed-income research at Bank of China International, said Chinese companies, in particular property developers, have already been returning thanks to the much lower financing costs available onshore.
In June Evergrande became the country’s first big developer to tap the domestic bond market in over six years. The coupon rate for Evergrande’s Rmb5bn ($800 million) 2020 renminbi bond is 5.38%, less than half what it pays on its $1 billion 2020 dollar bond – 12%. Both are five-year bonds.
Chinese property companies have raised about $35 billion by issuing domestic bonds this year, up 13% from the same period last year, according to Dealogic data. In contrast, dollar bond issuance from Chinese property developers dropped by 52% to $8.3 billion over the same period.
That trend now looks set to continue, even grow.
“Lower costs are always the main driver,” Wang of BOCI told FinanceAsia. “Now [Chinese companies] could be more motivated to come back to onshore market to issue bonds [to avoid currency risks].”
On Tuesday, the Chinese currency closed flat against the dollar after the central bank set the daily fixing at 6.3966 a dollar, within 0.03% of the previous close.
