The Fed's rate cut is to spur a recovery in China's offshore bond issuance
In the first half of 2024, the monetary policies of China and the US continued to diverge, with the China-US interest rate spread remaining at a high level. As a result, the offshore issuance cost remained high for Chinese issuers, leading to stagnant Chinese offshore bond issuance. The total issuance volume was USD 104.4 billion, a 3% year-on-year increase. Except for the Local Government Financing Vehicle (LGFV) sector, all other sectors saw a negative net issuance after deducting bond repayments. The financial institutions sector saw a 15% year-over-year increase in offshore issuance in the first half of 2024. The property developers' financing and contracted sales showed a narrowing decline in May and June, but their offshore issuance remained weak, with a 52% year-over-year decrease in the first half of 2024. Notably, Chinese internet companies sparked a convertible bond issuance wave, with a total of $70 billion issued in May. The attractive stock valuations and low financing costs of convertible bonds made them popular among investors and issuers.
The LGFV sector saw a surge in offshore bond issuance during the first half of 2024, with a total of USD 23.4 billion issued, representing a 49% year-over-year increase. This resulted in a net financing of USD 12.5 billion, a significant 111% year-over-year jump. Shandong, Zhejiang, Sichuan, and Jiangsu were the leading provinces in terms of offshore bond issuance volume during this period. Though Jiangsu and Zhejiang still on the top of issuance, they saw a decline from their peak levels. In recent years, the credit profile of LGFV issuers has weakened, with the proportion of below AA-rated and unrated issuers (as per onshore rating agencies) rising from 15% in 2020 to 31% in 2024. In the first half of 2024, direct issuance, cross-border guarantees, standby letters of credit (SBLC), and keepwell agreements accounted for 50%, 23%, 14%, and 3%, respectively, of the total LGFV offshore issuance. Notably, domestic guarantee companies are increasingly involved in LGFV issuance, serving as third-party guarantors in provinces like Sichuan, Hubei, Anhui, and Jiangxi, while SBLC are mainly seen in the Jiangsu-Zhejiang region, with city commercial banks being the main provider of the standby letters of credit.
Dim Sum Bonds and Panda Bonds continue to appeal to the issuers
Dim Sum Bond and Panda Bond issuance extended their growth momentum from last year, with issuance increasing by 23% and 54% year-over-year, respectively. For Dim Sum Bonds, the key growth driver of issuance was LGFV. The growth in Panda Bond issuance was mainly driven by foreign financial institutions and wholly foreign-owned enterprises in China. Panda Bond issuance by foreign banks, foreign enterprises, and wholly foreign-owned enterprises in China saw significant increases of 11 times, 97%, and 13% year-over-year, respectively. Foreign banks like Crédit Agricole and Deutsche Bank have done multiple Panda Bond issuances so far in 2024. The relaxation of rules on the use of Panda Bond proceeds by the PBOC and State Administration of Foreign Exchange at the end of 2022 has made Panda Bonds more attractive to foreign issuers. Compared to US dollar-denominated debt, Panda Bonds and Dim Sum bonds have lower financing costs for issuers. We believe that driven by policy support, cost advantages, and the internationalization of the renminbi, Panda Bonds and Dim Sum bonds will continue to be in high demand by issuers.
Emerging value in China’s offshore bond
By August 5, 2024, the Markit iBoxx China Total Return Index has recorded a 5% return this year. Investment-grade bonds, closely tied to benchmark interest rates, have returned 4%. High-yield bonds from property developers and financial institutions have outperformed those of local government financing vehicles (LGFVs). Year-to-date, the Markit iBoxx China Real Estate High Yield index has returned 13%. Since the start of 2024, property development bond prices have continued to recover amid favorable policies like housing destocking and relaxed purchase restrictions. The Markit iBoxx China Financial index has returned 6%, with investment-grade bonds up 4% and high-yield up 14%, boosted by stronger performance from non-bank financial institutions. Looking ahead, as the U.S. Federal Reserve's interest rate cuts enter the countdown stage, funds are likely to return to developing countries' high-yield assets, further supporting China's offshore bond market.
ANALYSTS CONTACT
Primary Analyst
Winnie Guo
+852 3615 8344
Secondary Analyst
Jameson Zuo, FRM
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Committee Chair
Larissa Wu
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Allen Wei
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allen.wei@cspi-ratings.com
Date of Relevant Committee: 13-August-2024
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