Risky Borrowers Elude Deleveraging Campaign Via Offshore Bond Market

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China’s high-yield borrowers are dodging Beijing’s ongoing deleveraging campaign by turning to the offshore bond market for funds.

While China’s ongoing deleveraging campaign and efforts to rein in the shadow banking sector have the goal of reducing systemic financial risk, they may also be making matters more fraught by driving up yields and pushing borrowers abroad.

Data from Bloomberg indicates that high-yield Chinese borrowers issued $2.8 billion in offshore high-yield dollar bonds in the two weeks through March 23, for the largest fortnightly volume since the start of the new year.

Property developers in urgent need of cash account for much of the issuance, while Moody’s Investors Services expects the securities to potentially account for 40% of all Chinese corporate debt sales in dollars for 2018.

Sandra Chow, Singapore-based senior analyst at research group CreditSights, points to a surge in Chinese issuance is a key risk for the Asian dollar bond market this year.

“Curbs on shadow banking may be contributing to higher yields in the onshore bond market – such as by reducing demand for onshore bonds from wealth management products, and therefore encouraging more issuance offshore,” said Chow to Bloomberg. 

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