Cash-starved Chinese borrowers could drive up dollar interest rates next year, drawing in huge amounts of foreign capital as they wrestle with tighter money at home and an official campaign to reduce debt.
Offshore borrowing by Chinese corporates has already soared this year as firms struggle with tighter funding conditions in yuan markets. Both syndicated loans and bond sales by Chinese firms, mainly in US dollars, have climbed significantly.
High-rated Chinese issuers sold offshore US dollar bonds with coupons as low as 1.86% this year, considerably cheaper than the cost of domestic bank loans or bonds.
For junk-rated real estate developers, funding costs reached as high as 13.88%. For these issuers, domestic funding is often not available at all because of regulatory and capital constraints facing onshore lenders.
With China’s central bank in recent weeks signalling an unofficial shift to tighter policy, that trend looks set to accelerate, analysts said.
Dollar interest rates in Asia will face upward pressure not just from the impact of reduced US monetary stimulus as the Federal Reserve winds back a five-year quantitative easing strategy, but also from heavy demand for funding from Chinese borrowers.
“There will be a further increase in issuance by China and a crowding-out effect in regional bond markets,” said Mirza Baig, rates and FX strategist at BNP Paribas in Singapore. BNP predicts Chinese offshore bond issuance will grow by another 15% in 2015.
China’s domestic funding costs are rising as the government moves to loosen its tight grip on interest rates, which for years held borrowing costs at artificially low levels to support state industries. The discount rate for one-year bank acceptance bills, viewed as a rough proxy for lending rates, was at 6.13% on Tuesday, up from 3.72% in late May.
Borrowing onshore has fallen as rates have risen. Growth in new onshore credit from all sources, including bank loans, bonds, and shadow bank lending, has slowed from 32% year-to-date through the first six months of this year to 14% through November, central bank data shows.
Offshore credit has partially filled the gap. US dollar and other foreign currency bond sales by Chinese non-financial firms increased from $47 billion in 2012 to
$99 billion through mid-December this year, according data from ThomsonOne, a deals database.