China Approved More Companies to Sell Foreign Bonds, Sources Say

Updated on
  • Some new bond issuance quotas are said to expire in March 2018
  • First sovereign dollar bond since 2004 paves way for companies

China’s top economic planning agency has granted approvals to a number of mainland companies to sell bonds overseas, according to bankers with knowledge of the matter, a move that will help keep the record pace of issuance alive.

Some of the quotas from the National Development and Reform Commission expire in March instead of at year end, said the bankers who aren’t authorized to speak publicly and asked not to be identified. Officials at the NDRC weren’t immediately able to comment.

The approvals were received last week when China’s 19th Communist Party congress concluded and the sovereign undertook its first dollar bond offering since 2004. The new issuance may add to the record $150 billion of year-to-date sales of dollar bonds by Chinese borrowers, which is 78 percent higher than for the same period a year ago.

“It is reasonable to assume offshore Chinese corporate issuance to pick up after the successful issuance of China dollar sovereign bonds,” said Jenny Zeng, a Hong Kong-based portfolio manager and head of credit research for Asian fixed income at AllianceBernstein Holding LP. Still, Zeng said she would be surprised if companies were able to price tighter to their current curves given existing levels.

The benefit of China’s sovereign dollar bond sale is expected to extend beyond state-owned companies to other firms on the mainland, Ding Yu, general manager of the treasury department at China Grand Automotive Services Co., one of the nation’s largest automobile dealers, said in an interview on Oct. 27. China Grand Automotive sold a junk-rated dollar perpetual last week.

High Demand

Investor demand for China’s $2 billion sovereign bond deal last week reached 11 times the issue size and the notes traded tighter the day after the sale. The spread on the $1 billion five-year sovereign bond was little changed at about 15 basis points over Treasuries on Thursday in Hong Kong, while 10-year notes were at 17.6 basis points, compared with 25 when they sold on Oct. 26, according to data compiled by Bloomberg.

Spreads on high-quality quasi-sovereign notes may tighten further, as they still seem too wide, JPMorgan Chase & Co. said in a note last week. Spreads on several Chinese state-owned company bonds had been dropping even before the sovereign deal in anticipation it would price tight.

Chinese dollar bond offerings in October totaled about $14.7 billion, compared with $29.7 billion for the last quarter of 2016, according to data compiled by Bloomberg.

The bond issuance quotas will mainly be provided for refinancing purposes as deleveraging is still a key focus for China, according to Derek Lin, a credit analyst at DBS Group Holdings Ltd.

“The government wants to make sure there are sufficient funding sources for most companies, so they would not run into financial distress,” Lin said. “I don’t think the floodgates will be widely open.”

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