Expectation comes amid tight regulations, rising costs and possible Fed hikes
Chinese companies are expected to raise more funds in the global dollar bond market this year after robust issuance in 2017, even as inflation fears trigger speculation that major central banks might raise interest rates more aggressively.
Tight regulation and rising funding costs in China have pushed many Chinese firms to shift their fund-raising activities from the onshore to offshore market in the past year, resulting in a sharp drop in mainland bond issuance.
"The clampdown on some types of bank credit, particularly shadow banking and interbank activities, has pushed up corporates' funding costs in the onshore market," Fitch Ratings said.
"Corporates have responded by shifting issuance toward the offshore market. These trends are likely to continue in 2018, with little sign that the authorities are set to loosen their stance," it said.
The amount of offshore dollar corporate bonds issued by Chinese corporates doubled in 2017 to 1 billion, in deep contrast to the shrinking onshore market, according to statistics from Natixis.
China is in its second year of a deleveraging campaign to reduce financial risks rooted in a rapid build-up of debt and riskier types of financing.
The People's Bank of China, the country's central bank, said on Tuesday it will step up macro-prudential management for shadow banking and real estate financing.
"Funding costs will still be cheaper offshore, though the U.S. Federal Reserve is set to raise interest rates multiple times this year," said Steve Wang from Bank of China International, adding that it takes time for short-term rate hikes to be transmitted to longer terms.
As an example of funding cost differentials, Chinese real estate developer China Vanke, rated BBB, has an onshore bond yielding of 5.6 percent with a duration of 4 years, while its offshore three-year bond yields 3.7 percent, bankers say.
"Deal flows of dollar bonds remain quite strong this year, both for refinancing needs and new issues. We already have a lot of deals in the pipeline that will be completed in the first half of the year," said a debt capital markets banker at an American bank in Hong Kong.