Photographer: Qilai Shen/Bloomberg

How Chinese Capital Controls Could Rattle the Asian Bond Market

  • While companies can issue abroad, Chinese buyers are blocked
  • Yields to climb as bond supply balloons: Standard Chartered

Asia’s dollar bond market could be one of the biggest casualties of China’s crackdown on cash leaving the country.

Hemmed in by stringent curbs on borrowing at home and on overseas dealmaking, Chinese companies will be forced further into the offshore debt market to fund their more than $200 billion in acquisitions announced this year, according to Standard Chartered Plc. That could mean an explosion in supply for a market already facing risks from a rising dollar.

At the same time, Chinese dollar-denominated debt sales are increasingly targeting Chinese investors diversifying from the yuan -- and they’re now subject to the same restrictions on moving money abroad as the companies.

“It’s said to have become very difficult to send onshore funding offshore,” said Chao Li, head of Standard Chartered’s Greater China bond syndicate in Hong Kong. “There would be natural pressure for Asian dollar bond yields to go up because of the increase in supply, especially for Chinese high-yield names, which have received good support from Chinese investors.”

Chinese authorities are bolstering their efforts when it comes to stemming capital outflows as the Federal Reserve’s tightening bias spurs yuan losses.

The government has banned most foreign investment of $10 billion or more by Chinese companies, according to people familiar with the curbs. It’s also making it harder to move funds overseas. That’s complicated life for Chinese firms on an unprecedented buying spree epitomized by China National Chemical Corp.’s $43 billion takeover of Switzerland’s Syngenta AG in February.

Money Trapped

The restrictions, a response to the yuan’s 5.9 percent slump against the dollar this year, will trap money inside the country and deter business, according to the European Union Chamber of Commerce. The business group says the State Administration of Foreign Exchange, or SAFE, has issued so-called window guidance, requiring its approval for movement of amounts over $5 million under the capital account.

“If capital controls continue, fund flows may not be as strong as the market expects and there could be less support for Asian dollar bonds,” said Annisa Lee, head of Asia ex-Japan flow credit analysis at Nomura Holdings Inc. in Hong Kong.

Until this year’s curbs, the government had been encouraging firms to expand overseas. A ban on highly leveraged property developers selling bonds onshore had also enlivened the dollar-debt market.

Chinese companies were responsible for 55 percent of the $181 billion of U.S. currency bond issuance this year in the Asian region excluding Japan, more than double their market share four years ago, data compiled by Bloomberg show. Offerings could exceed $200 billion next year, according to Commerzbank AG, which estimates 75 percent of tier-one, Basel III-compliant Chinese bonds are held by onshore investors.

Yield spreads on Chinese dollar-denominated bonds have widened 10 basis points from a nine-year low reached in August, according to JPMorgan Chase & Co. indexes. That for Asian dollar debt swelled just five basis points.

The crackdown on outflows will particularly hit building companies and issuers with debt maturing next year, said Lee at Nomura.

“The controls right now are more on companies trying to diversify their asset portfolios and households trying to do that on a massive scale,” said Helen Qiao, chief Greater China economist at Bank of America Merrill Lynch in Hong Kong. “SAFE will be keeping a close eye on who is borrowing and how much they have borrowed.”

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