Chinese Firms Rack Up Foreign Debt Again in Boost for Yuan

When the yuan was weakening, Chinese firms flocked to repay foreign debt, forming a powerful group of sellers at just the wrong time for the currency. Now the opposite may be set to occur.

In the second and third quarters of last year, overseas credit rose at a pace unseen since early 2015 to $1.68 trillion, near an all-time high. And Chinese companies’ sales of foreign-currency bonds reached a record $133 billion in the final three months of the year, Bloomberg data show.

While most of last year’s new money stayed outside of China, there are rising prospects in 2018 of a virtuous cycle for the yuan if more offshore financing is brought home. A deleveraging campaign is pushing up domestic borrowing costs, encouraging companies to raise money overseas and repatriate it. And with the yuan strengthening through one milestone after another, the risk of owing dollar debt during a sharp depreciation has dropped off the radar.

“Foreign debt rebounded mostly because of overseas investments, for instance M&A. In 2017, not a lot of it flowed back into the onshore market,” said Wan Zhao, a Shanghai-based analyst at China Merchants Bank Co. “This year, overseas fund-raising and repatriation back onshore should increase because domestic funding costs will rise.”

Chinese foreign debt climbed $259 billion last year through September, driven by increased borrowing by banks and companies, data from the State Administration of Foreign Exchange show. Global banks’ claims on the nation rose $208 billion in the first three quarters last year, the most since early 2014, to $939 billion, according to the Bank for International Settlements’ latest data.

Global Funding

Even as global yields rise, there are good reasons to go abroad for cash. A gauge of dollar strength sank to a three-year low this week, boosting confidence the yuan is unlikely to depreciate any time soon. China’s currency rallied 0.5 percent to its highest level since November 2015 on Thursday.

And Beijing’s monetary and regulatory tightening has pushed up loan rates and bond yields, while making it harder to access credit from shadow financing channels. 

Dollar bonds sold by investment-grade Chinese companies yield 3.85 percent, according to an ICE Bank of America Merrill Lynch index, compared with 5.42 percent for onshore five-year notes from AAA rated issuers. A year ago the gap was just 73 basis points.

Hedging costs look reasonable, too. The steadier exchange rate has helped one-year onshore forward points stabilize around their one- and five-year averages.

“If companies are facing this kind of crunch in credit conditions domestically, of course they want to borrow abroad,” said Shen Jianguang, chief Asia economist at Mizuho Securities Asia Ltd. in Hong Kong. “It also makes economic sense because of low interest rates offshore plus the stable currency.”

Carry Trade

It is not clear whether the once-popular trade of borrowing abroad to buy the yuan has staged a comeback. Global bank claims on China of a year or less -- considered a gauge of such trades -- rebounded by $188 billion in 2017 through the third quarter, BIS data show.

Still, both China Merchants Bank’s Wan and Mizuho’s Shen doubt the trade has regained its appeal. There’s more two-way currency volatility now, Shen explained.

— With assistance by Emma Dai