China State Firms Help Offset Outflows With Overseas Debt

Updated on
  • Dollar bond issuance surges to quarterly record $18.7 billion
  • Shows efforts to limit outflow pressures, RBS economist says

China’s national team is getting bigger.

After stepping into the currency and equity markets repeatedly over the past year to stem declines, government-linked entities are now spurring capital inflows by raising money offshore and bringing it home. Sales of dollar bonds by some of China’s biggest state-run firms rose to a record $18.7 billion in the April-June period, about 80 percent higher than the average of the previous four quarters. In comparison, overall issuance by Chinese companies shrank 11 percent as a weakening yuan drove up the cost of servicing overseas debt.

This comes after China’s top economic planning agency said last month that it has allowed 21 companies -- including the nation’s biggest banks -- to sell foreign-currency debt without having to first seek approval. The government encourages the companies to bring the proceeds onshore to convert into the yuan, the National Development and Reform Commission said.

“This reflects policy efforts to counterbalance capital outflow pressures,” said Harrison Hu, Singapore-based chief Greater China economist at Royal Bank of Scotland Group Plc. “Asking large companies to raise more foreign debt could help anchor sentiment and expectations of other companies. This could help prevent panic capital outflows.”

Chinese authorities have a long history of encouraging state-owned enterprises to act in policy makers’ interests rather than their own. Government-run banks financed an infrastructure building boom to spur economic growth during the global financial crisis eight years ago, saddling themselves with a pile of bad loans in the aftermath. When Chinese stocks suffered a $5 trillion crash last year, SOEs stepped in to support the market, only to watch share prices fall to new lows at the start of 2016.

In the currency market, the People’s Bank of China has gone to great lengths to discourage outflows and depreciation bets. It ordered lenders to stop sending money overseas and drove offshore yuan overnight borrowing costs to an implausible 66.8 percent in January. Last week, after the yuan weakened past 6.7 per dollar, the PBOC set reference rates stronger than that level even as the dollar advanced. The currency, which broke a six-week run of losses to close 0.12 percent stronger last week, was trading at 6.6790 a dollar Monday evening.

The yuan’s 3 percent decline in the second quarter, the most on record, triggered an increase in the amount of cash leaving the country, according to analysis by Goldman Sachs Group Inc. The U.S. bank estimates $49 billion of foreign-exchange outflows in June, compared with $25 billion in May.

More Sales

The rise in dollar-debt issuance by state-owned enterprises is set to continue in the third quarter. China Development Bank Corp. was scheduled to hold investor meetings for dollar bond issuance over the weekend in Hong Kong and Singapore, according to a person familiar with the matter. Bank of China Ltd. issued Asia’s largest dollar-denominated green debt earlier this month as part of a three-currency offering equivalent to $3.03 billion. Sinopec Group Overseas Development Co., a unit of China Petrochemical Corp., issued $700 million of 10-year bonds in May at a coupon of 3.5 percent.

The NDRC didn’t immediately reply to a fax sent July 21 seeking comment. At least three calls each to Bank of China, China Development Bank and China Petrochemical went unanswered.

The June 7 NDRC statement on overseas debt sales said the government encourages parent companies, rather than their overseas units, to bring home proceeds of bond sales abroad. In a separate announcement, it said that it encourages local companies in China’s four free-trade zones -- rather than their overseas units -- to issue bonds. In this case, too, they should repatriate the funds to China.

“What’s in the policy makers’ mind may be to boost capital inflows,” said Zhou Hao, an economist at Commerzbank AG in Singapore. “However, taking a look at the amount, it’s still a drop in the bucket. The actual impact could be limited.”

— With assistance by Molly Wei, and Helen Sun

(Updates yuan move in 6th paragraph.)
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