China’s institutional investors are shying away from the dollar-denominated bonds of domestic corporation, compelling some borrowers to turn to the more expensive offshore debt market.
Sources speaking to the Wall Street Journal said that the country’s leading financial institutions including banks, insurers and asset managers, are showing weaker demand for dollar debt after sustaining losses on their bond holdings.
The JPMorgan Asia Credit Index, which measures the performance of regional dollar-denominated debt and half of which consists of Chinese bonds, saw a 1.4% negative total return in the first quarter of 2018.
Analysts say that as a consequence the heavy over-subscriptions for China’s dollar bond offerings have likely come to an end, after Chinese companies issued an record-breaking $118.4 billion in dollar-denominated debt in 2017.
China National Chemical Corp received orders of $9.9 billion for its issuance of $4.95 billion in dollar-denominated bonds last month, for a twofold oversubscription.
In July 2017, however, its sale of $3 billion in debt was oversubscribed fourfold, even though yields back then were lower.
Steel producer Shougang Group has seen a similar drop in subscriptions, with its issue of $500 million in one-year debt at a 3.95% yield in late March attracting $1.4 billion in orders, as compared to orders of $2.8 billion for its issue of $400 million in five-year debt with a 3.478% yield last September.
The decline in the “China bid” for dollar-denominated corporate debt is forcing some borrowers such as real-estate developers to turn to offshore markets for funds, where financing costs are now far higher.
Chinese property developer Fantasia Holdings Group sold $300 million in dollar notes with a 364 day maturity and a yield of 7.25% in February, while Guangzhou R&F Properties recently sold $600 million in three-year dollar debt at a yield of 7%.