Markets

Christopher Langner is a markets columnist for Bloomberg Gadfly. He previously covered corporate finance for Bloomberg News, and has written for Reuters/IFR, Forbes, the Wall Street Journal and Mergermarket.

In Europe, money is cheap and investors are being deprived of the few safe bonds that may offer positive yields. It's time for China to come to the rescue.

As the European Central Bank published details of the corporate bonds it purchased under its unorthodox monetary policy, it became clear that no debt will be spared. The more than 440 debentures that ended up in its portfolio included even foreign companies such as New York-headquartered Bunge and Swiss miner Glencore, whose notes were yielding in the double digits as recently as January. Junk-rated firms like Lufthansa and Telecom Italia also made the cut.

The result was just what authorities wanted: The cost of borrowing in euros has plunged.

What a Bargain
Corporate yields in euros have halved since the beginning of the year and they were low to start with
Source: Bank of America Merrill Lynch; Bloomberg

In spite of that, the amount of euro-denominated bonds that Chinese non-financial firms have sold remains low versus offerings from the rest of Asia. 

That may in part be explained by the recent popularity of China's local bond market. Yet, for many of the nation's blue-chip stocks, which have global businesses and need offshore funding, there's a case to be made for raising money in euros rather than dollars.

Missing the Boat
China's share of euro-denominated bond issuance isn't reflective of the country's heft in Asia
Source: Bloomberg

Coupons are an obvious one, with the absolute yield a BBB or single A-rated company enjoying in euros now a third what it would be in the U.S. currency.

Prudent chief financial officers, however, will also factor in the cost of hedging the cash flows from a bond. Continued outflows from China have pushed basis swaps for the yuan into deeper negative territory than for the euro. That means that entering a contract to neutralize future fluctuations of the euro versus the Chinese currency has become more costly.

More Expensive Than Europe
As outflows from China continue, two-year basis swaps for the yuan have dropped below those for the euro, increasing the cost of issuing bonds in Europe for Chinese companies
Source: Bloomberg

Even so, it may still be more economical to issue in euros. Besides, Chinese CFOs aren't always that prudent, and if they're brave enough to take a punt, they'd probably have a strong argument for it now. Some yuan forecasters are seeing an end to the currency's devaluation , or at least a slower decline, after the worst quarter on record. Meanwhile, the median expectation among 102 economists surveyed by Bloomberg is for the euro to be at 1.08 per dollar by the second quarter of 2017, versus 1.108 currently.

If both trends were to materialize, unhedged euro-denominated debt could have zero cost for the next year for a Chinese company. Naturally, the opposite would also be true: If both currencies move against expectations, costs could increase substantially.

Faced with a dearth of positive-yielding debt, European money managers would probably fistfight over blue-chip notes from Beijing. It's just a matter of the Chinese coming to the party.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Christopher Langner in Singapore at clangner@bloomberg.net

To contact the editor responsible for this story:
Katrina Nicholas at knicholas2@bloomberg.net