China's Credit Party Rolls On Despite S&P's DowngradeBy , , and
Downgrade to have only marginal impact on yield spreads: ING
Chinese firms sold record amount of dollar bonds this year
China’s latest rating cut won’t take away the punch bowl, and investors are likely to keep lapping up debt of the nation’s companies at an unprecedented pace.
That’s the view of many money managers and analysts after S&P Global Ratings lowered China’s credit score for the first time since 1999. They have recent precedent for that forecast. Even as Chinese authorities have cracked down on excessive borrowing in the financial system, firms have taken advantage of low interest rates to pile on debt.
A growing contingent of local investors along with fund managers from Singapore to London keen for higher yields continued to seek out Chinese company notes in dollars even after Moody’s Investors Service downgraded the nation in May. That helped boost such sales to a record this year.
"S&P’s is more of a catch-up rating action," said Neel Gopalakrishnan, senior credit strategist at DBS Group Holdings Ltd. “There should not be much impact on credit markets. A+ is still a solid investment grade rating. There is no material information in S&P’s release that the market was not already aware of."
The downgrades come at a pivotal moment for China’s credit markets. The government itself is planning a return to the dollar bond market for the first time since 2004, seen as a move to pull down the borrowing costs of state-owned enterprises. Just as authorities open the $10 trillion local bond market further to global funds, Chinese borrowers including property companies have increasingly turned to creditors overseas to sidestep local financing restrictions and to help finance foreign acquisitions.
Private-sector firms including Dalian Wanda Group Co. and HNA Group Co. have faced increased scrutiny from the government on their overseas investments, adding to concern about possible debt hangovers should financing costs rise sharply in the future. And while scares in the local note market have eased in recent months, investors have been grappling with the longer-term trend of rising debt failures since the first onshore bond default in 2014.
Other areas of concern for foreign investors in Chinese bonds include a lack of transparency, question marks around corporate governance and a different legal system. Tokyo-based Mitsubishi UFJ Kokusai Asset Management has said it’s avoiding Chinese corporate notes because of uncertainties about the nation’s policy outlook.
Chinese corporate borrowers have issued a record $133 billion of dollar-denominated bonds this year, according to data compiled by Bloomberg. They must repay $203 billion of such securities through the end of 2020. So far, the increased ability to raise funds overseas has helped many Chinese firms refinance debt at favorable costs.
When Moody’s cut its score on China on May 24, dollar borrowing costs for Chinese companies rose only slightly and briefly, before falling back near the lowest levels in a decade. Financing costs in the local bond market have also remained generally steady since then.
The extra yield that investors demand to hold securities in the U.S. currency from Chinese issuers rose only about 2 basis points in the two days after the Moody’s move in May, according to a JPMorgan Chase & Co. index. It is little changed since that day at 266 basis points, near the 257 basis points marked in March that was the lowest since 2007.
“Moody’s was the first mover and we all remember spreads squeezed back in," said Antonio Cailao, director of Asian credit trading at ING Bank NV. "So S&P just played catch-up to Moody’s and we expect marginal impact on spreads."
That would be welcome news for China’s Ministry of Finance ahead of an expected $2 billion bond offering.
“I don’t think this would impact the sovereign issuance in a material way, but the timing does surprise me a bit," said Anne Zhang, executive director for fixed income, currencies and commodities at JPMorgan Private Bank in Asia. “The expected anchor orders would be Chinese, and they are rating neutral.”
China bulls shrugged off the downgrade, helping a state-run lender sell the biggest dollar-denominated bond in Asia outside Japan since 2014. Postal Savings Bank of China Co. priced $7.25 billion of additional Tier 1 perpetual securities Thursday. That was the largest dollar deal since Alibaba Group Holding Ltd. secured $8 billion in November 2014.
Avic International Leasing Co. is among six companies that registered recently for offshore bond sales. Such sovereign downgrades won’t impact bond issuance overseas and the firm’s plan to sell notes offshore will be carried out as planned, according to the company’s media relation department.
The downgrade just brings S&P’s rating on China into line with the two other major rating firms, and is “largely a non-event from a market perspective," said Todd Schubert, head of fixed-income research at Bank of Singapore. “I don’t think it will have an adverse impact on the sovereign issue or on the future borrowings of corporates.”
— With assistance by Judy Chen, Dong Lyu, and Annie Lee