Indications that China’s National Development Reform Commission (NDRC) is getting close to its informal offshore bond quota could lead to a drop off in issuance from the country during the fourth quarter according to mainland-based bankers.
The NDRC’s bond approval procedures have frequently been hard to decipher. But Chinese bankers say they are getting clear feedback from the regulator that it is now very close to its country limit for the year.
In the year-to-end August, Chinese borrowers raised $121.63 billion in the dollar-denominated bond markets according to Dealogic figures.
“We’ve also been told there will be no more approvals after the National People’s Congress (NPC) gets going in mid-October,” one banker added. “So prospective borrowers need to be filing their applications now to make sure they get approved in time.”
The NPC is held every five years to elect top officials including the Politburo and the 19th one will be as closely watched as ever for signals about where real power lies in China. It is due to begin on October 18.
As such, it will be a politically sensitive time for Chinese bond issuance, although a successful NPC may result in a long-anticipated transaction by the sovereign itself.
The last time it came to the G3 market was in October 2004 with a twin tranche dollar and euro-denominated deal. This time round, the government is rumoured to be seeking $2 billion plus and will likely prompt “an absolute riot” according to one banker.
The sovereign aside, any prospective slowdown in Chinese issuance will have a significant impact on the wider Asian bond market given the increasing weighting the country has with every passing year (58% of dollar-denominated issuance in the year-to-end-August).
But where 2017 is concerned, this may end up being no bad thing given the huge wave of issuance the market has had to absorb so far.
Towards the end of July, investors showed signs of struggling to physically digest the mountain of paper being presented to them and mentally accept proposed pricing levels after such a long bull run.
And as we reported in part one of an autumn DCM preview, Asia dollar-denominated issuance has already had a record-breaking year. Asian borrowers raised $209.7 billion to the end of August, surpassing 2016’s previous record-breaking $208.71 billion total according to Dealogic figures.
Regulatory risk
In HSBC’s August edition of the The View, (its monthly Asian bond market report) the bank reiterated a second way in which the Chinese government may affect the market. “We feel the high-yield corporate sector will underperform on the back of Chinese regulatory risk and substantial primary market issuance from existing and new issuers in the coming few months,” it wrote.
A regulatory crackdown on debt-driven acquisition strategies has had a big impact on certain Chinese credits, most notably Dalian Wanda. Its bond complex is still down 11 to 12 points after dropping off a cliff in late June following a meeting when the China Banking Regulatory Commission (CBRC) told bankers it did not consider the group’s most recent overseas acquisitions in line with the country’s investment policy.
Other individual high yield credits including Noble Group and Reliance Communications have also been on the receiving end of sharp sell-offs.
However, Jake Gearhart, Deutsche Bank’s head of debt origination and syndication, APAC believes Asia has got far better at ring-fencing credit issues around the borrower concerned. “The region is maturing,” he commented. “Problems with one individual credit have not led to sector wide panics and that’s a good thing.”
For instance, investors are still struggling with Evergrande’s mammoth $6.62 billion triple-headed Medusa of a bond offering from mid-June. The two shorter dated tranches continue to trade one to two points below their par issue price.
But the rest of the Chinese property sector has performed well. Two examples are Future Land’s 2020 bond, which has jumped five points at the beginning of July and has traded around that level ever since, while China Jinmao’s 2022 bond rose 1.3 points over the same period.
Property sector re-rating
HSBC fixed income analysts attribute the sector’s positive re-rating to, “good first half results as higher market sales achieved last year filtered through the income statement.”
Indeed, Chinese property is a very good example of a sector where investors appear to be displaying a high degree of comfort: some might say complacency. Bankers say accounts are increasingly taking a top down approach on the grounds the sector has become too big to fail. Only the smallest caps are being subjected to detailed credit analysis.
However, bankers also expect property sector issuance activity to moderate and believe local government financing vehicles may fill the gap over the coming two months. “There’s been almost no issuance from them so far this year,” commented James Arnold, Citi’s head of debt capital markets syndicate, APAC. "We’re expecting more over the coming months.”
Arnold also expects more issuance from China’s investment grade complex.
JP Morgan’s Asian fixed income team concurs. One of the reasons why the desk recently upgraded their full year Asian issuance expectations to $265 billion is “because of a pick up in supply from China investment grade on abating concerns about Rmb weakness".
Deutsche’s Gearhart explains why. “Over the longer term, we expect the Rmb to weaken,” he said. “But this year, the currency has benefited from challenges in the US. That’s been an unexpected gain for China.”
In the final part of FinanceAsia’s Asian DCM preview, we will look at trends across the rest of Asia and risks, which may derail the current issuance bonanza.
