Chinese Companies Face Premium to Resume Selling Dollar Debt
After issuance ground to a halt for nearly a month, Chinese U.S.-dollar bonds are starting to flow again
The Shanghai headquarters of Shanghai Pudong Development Bank, which is issuing a benchmark three-year bond. Photo: Tomohiro Ohsumi/Bloomberg News
By Fiona Law And Carol Chan
Sept. 9, 2015 4:07 a.m. ET
Improving market sentiment has Chinese banks and companies restarting their offshore-debt engines—but given the economy’s struggles to revive, this comes at a price.
Chinese U.S.-dollar bonds dominate Asia’s $874 billion bond market, but issuance ground to a halt for almost a month as China’s worst stock selloff in years, the devaluation of the yuan and a succession of weak economic numbers damped investor appetite for the country’s debt.
As China’s stocks began to rebound this week—lifting equities around the region—windows reopened for Chinese businesses from lenders to highway operators to tap funds in the offshore debt market.
Out the gate Wednesday are the Export-Import Bank of China and midsize lender Shanghai Pudong Development Bank Co. Shanghai Pudong is issuing a three-year benchmark bond—a benchmark issue typically amounts to about $500 million—for working capital and general corporate purposes, according to a term sheet seen by The Wall Street Journal.
But the offering yield of 2.8%, some 1.75 percentage points above the yield on comparable U.S. Treasurys, exceeds the current yields on three-year bonds from its peers China Merchants Bank Co. and China Minsheng Banking Corp. , currently at 2.53% and 2.56%, respectively.
“Chinese banks are caught in both a general risk-off sentiment toward Chinese credits and a concern on rising [nonperforming loans],” said Binay Chandgothia, portfolio manager at Principal Global Investors. “People are concerned about the Chinese currency and a hard landing in the economy. They would ask, Will there be more NPLs on banks’ balance sheets?”
Yields on Chinese corporate bonds have been climbing since the stock-market rout began in June; the spread over the benchmark U.S. Treasury yield has widened in that time to 3.5 percentage points from 3 percentage points, according to the J.P. Morgan Asia Credit Index.
The Export-Import Bank is selling two tranches of dollar-denominated bonds under a $6 billion loan-backed medium-term notes program, according to a term sheet seen Wednesday by The Wall Street Journal. The Chinese policy bank plans to raise $1 billion to $1.5 billion, according to a person close to the deal.
Likely offerings coming up include an issue of about $200 million by the Hong Kong subsidiary of brokerage firm China Securities Co., another person said. Toll-road operator Shenzhen Expressway Co. is holding roadshows for a potential bond sale.
To gain investor traction, they too are likely to pay a premium, investors and bankers say.
The return of dollar-debt issuance is supported in part by the Chinese investors who have fled yuan-denominated assets as the currency’s prospect has dimmed since the devaluation. Shanghai Pudong Development Bank has already secured a number of orders from peer Chinese banks, according to people familiar with the deal. A large amount of cash has recently flooded into Hong Kong, long the first stop for mainland Chinese and their cash.
Dim-sum bonds, or offshore debt denominated in yuan, lost 3.4% since the currency devaluation in mid-August, according to HSBC Offshore Renminbi Bond Index.
Also helping Chinese borrowers sell debt is the latest rebound in China’s stock market, after it dragged down equities all over Asia while falling 43% from its peak in mid-June to its lows at the end of last month. The benchmark Shanghai Composite rose a combined 5.3% Tuesday and Wednesday. Japan’s Nikkei Stock Average jumped 7.7% Wednesday, its biggest percentage gain in nearly seven years, while in late trading Hong Kong’s Hang Seng Index was up more than 4%.
Beyond China, the Korea Development Bank is selling 10-year dollar-denominated bonds, reflecting improved sentiment for Asia bonds in general.
Write to Fiona Law at fiona.law@wsj.com
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