Chinese dollar borrowing balloons as credit tightens at home
Record-breaking dollar bond sales from Chinese companies are steadily increasing the Asian giant's weight in global indexes, raising concerns about overexposure among investors who track them.
Corporates' rapid move onto offshore bond markets, partly a response to the crackdown on runaway credit growth at home, highlights China's multi-faceted indebtedness, a growing worry for investors. Overall debt is approaching 300pc of annual economic output (GDP) and Moody's said it was the reason for cutting China's credit rating for the first time in 30 years.
Stripping out maturing debt and coupon payments, year-to-date bond sales from companies in emerging markets total $65bn (€57.9bn) including $54bn from China, JPMorgan estimates. In gross issuance terms, almost half this year's emerging market corporate bond sales are from Chinese firms, the bank said.
Company debt issuance in other emerging markets has been subdued by commodity and growth slumps. Some indexes cap the weight they give to each country but most are committed to broadly representing the market.
This means that the indexes have to increase the weighting they give to China and investors whose portfolios track or benchmark an index must adjust accordingly. "It poses a challenge for global portfolios. You don't want to have too much of a good thing," said Greg Saichin, head of emerging debt at AllianzGlobal Investments.
China today comprises over 20pc of the Markit iBOXX emerging market corporate index versus 0.5pc in 2007.
In JPMorgan's CEMBI Broad index too, China is 21pc, up from less than 4pc in 2010, while in the iBoxx corporate dollar bond index which also includes developed countries, China has crept to 8pc, from less than 1pc five years ago.
Chinese firms should this year easily surpass the $108bn debt raised in 2016 and $116bn in 2014. In 2010, just $14bn was issued.
"It's just a juggernaut of issuance," said Guy Stear, co-head of fixed income research at Societe Generale in Paris. "It's so large that it's a game changer in terms of EM corporates... it's not just commodity companies, its cement, materials, internet companies, there's a broad range."
The Chinese deals are mostly welcomed by money managers who need to invest the money pouring into their funds. Also, Chinese state-run firms still carry investment grade ratings, unlike issuers from many big emerging economies such as Russia, Turkey and Brazil.
"Relative to rating, Chinese debt pays relatively decent yield... against that people are conscious that if you are running an EM credit fund you have very, very high exposure to one part of the world," Stear said.
Chinese authorities were trying to cool the dollar bond boom even before the Moody's rating downgrade.
That could accelerate as the downgrade is followed by rating cuts for state-run firms, which should also raise borrowing costs.
But bond sales are unlikely to grind to a complete halt. For one, raising cash overseas can allow companies to sidestep curbs that are in place to combat capital flight.
Second, for investment-grade Chinese firms, dollar borrowing works out some 90 basis points cheaper than on domestic markets where interest rates have risen.