A flight from yuan assets is helping cut China’s overseas borrowing costs to the lowest since the global financial crisis.
Demand for Chinese dollar bonds is surging as locals brace for more yuan losses, after the currency slumped 3.5% against the greenback in the past year. Banks sold 800 wealth-management products targeting US currency assets in the first seven months, up 44% from a year earlier, research firm PY Standard estimates. Assets at Chinese funds allowed to invest in overseas bonds more than tripled to 13.6bn yuan ($2.1bn) in the six months through June 30, according to Shanghai-based Z-Ben Advisors.
The flood of cash is driving a rally in Chinese firms’ dollar securities that cut their yield premium over Treasuries 32 basis points this quarter to 269 basis points on August 15, the lowest since January 2008, according to a JPMorgan Chase & Co index. That’s still wider than the 126 basis point average spread for onshore yuan notes. GF Fund Management Co sees falling borrowing costs and strong domestic investor demand fuelling even more Chinese dollar bond offerings, after issuance jumped 16% this quarter from a year earlier.
“Yuan depreciation expectations still exist,” said Guangzhou-based Li Yaozhu, assistant fund manager for GF Fund’s overseas bond fund, which returned 17% in the past year. “Chinese investors’ demand for bonds from Chinese names will continue to increase.”
Sliding borrowing costs make it cheaper for firms to fund mergers and acquisitions, or to repay debt onshore. Chinese companies have announced $158bn worth of overseas M&A deals so far this year, already surpassing 2015’s full-year record of $109bn. In the domestic market, they are facing a record 3tn yuan of bonds maturing in the second half.
The nation’s firms sold $13bn of dollar bonds in the offshore market this quarter, up from $11bn in the same period of 2015, data compiled by Bloomberg show. The previous three quarters’ sales all declined from the year-earlier periods. Local government financing vehicles have sold $2.17bn, compared with $850mn in the same period last year.
Chongqing Nan’an Urban Construction & Development Group Co, an LGFV in the southwestern municipality of Chongqing, returned to the offshore market to sell $200mn of 10-year dollar bonds last week, only a month after issuing $800mn of notes. The securities were mainly bought by Chinese banks and insurers, according to lead manager China International Capital Corp.
“The fund flow from onshore China will benefit both high- grade and high-yield bonds offshore,” Gordon Ip, who manages the $1.9bn Greater China High Yield Fund in Hong Kong at Value Partners Group. The fund has returned 11% this year, beating 80% of its peers. “The priority for the Chinese funds has been Chinese bonds but gradually they will also be open to buying other Asian bonds if the valuation is attractive.”
Investors are favouring state-backed issuers. The spread on state-owned metal trader China Minmetals Corp’s 2025 bond over US Treasuries declined 24 basis points this month to 201 basis points, compared with the average fall of just 8 basis points for Chinese firms’ dollar notes.
“China investors have been buying more than 50% of all recent Chinese deals,” said Avinash Thakur, managing director of debt capital markets at Barclays in Hong Kong. “Some of these investors then repackage the product and sell to Chinese high-net-worth or retail investors.”
Goldman Sachs Group estimated $55bn foreign- exchange outflows from China in July, compared with $49bn in June.
“In the coming three years, Chinese companies’ dollar bond yields will continue to decline because of the yuan depreciation outlook,” said He Xuanlai, a Singapore-based analyst at Commerzbank. “A lot of the money from China can only buy China names because of their own risk limits.”