Chinese companies have this year embarked on an unprecedented borrowing spree in international bond markets, a trend driven by property developers starved of credit by state-owned banks.
Mainland groups have already borrowed $12.2 billion from international investors so far in 2011 — more than five times the amount they had secured by the same point last year, according to data provider Dealogic.
Dealmakers calculate that within a couple of months the total will break the record $15.8 billion that Chinese companies raised from offshore bond sales during the whole of 2010.
”It’s been a phenomenal start to the year for the China market,” said Terence Chia, of Citigroup’s Asian debt syndication team. “We expect this trend to continue.”
Half of the offshore bond issuance this year has come from privately-owned property companies — such as Evergrande, Country Garden and Longfor Properties — that have seen funding channels dry up on the mainland.
Over the last year, Chinese regulators and senior officials have issued numerous public warnings and direct orders to the state-owned banks to reduce their exposure to real estate and rein in the flood of credit that has gone to the sector in the last two years.
“When they encounter a situation of real estate speculation the banks have the right not to lend,” Liu Mingkang, chairman of the China Banking Regulatory Commission, said at a forum on Monday. “It’s not that we don’t support the [real estate market], it’s a pillar industry and many other industries rely on it, but we cannot allow it to develop in an unhealthy way.”
While bank credit is still available to the largest state-owned developers and to the largest and most creditworthy of the private developers, many smaller and less well-connected companies have had their credit lines cut off.
As Beijing gradually ratcheted up its attempts to cool the property market last year many smaller developers turned to the nascent trust company industry, which helped them to raise money indirectly from banks and their customers through off-balance sheet transactions.
But when regulators realized the scale of this activity they moved to shut down this link between banks and trust companies in the latter half of last year and developers were forced to start looking beyond China’s borders for funding.
Some Chinese property companies such as China SCE Property Holdings have successfully raised funds from international investors by selling “synthetic” bonds, which have pay-outs linked to the value of the renminbi but are settled in dollars.
Yet property is not only sector that has been tapping the offshore markets with gusto.
China National Offshore Oil Corp, the state-owned oil company, raised $2 billion through an investment-grade dollar bond in January, while Winsway Coking Coal, which imports coal from Mongolia, raised $500 million in a high-yield deal this month. Fufeng, which makes monosodium glutamate, or MSG, last week raised $300 million.
Bankers say an increasing number of Chinese companies are planning to issue international bonds denominated in dollars, because funding costs are cheaper offshore than on the mainland.
If, as the market expects, the dollar continues to weaken against the renminbi, Chinese companies stand to make significant financial gains by denominating their liabilities in the US currency.
China National Petroleum Corporation is expected to next week issue more than $1bn of dollar bonds of different maturities, including a rare 30-year bond.