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Chinese companies are ditching the and flocking to the euro to raise new offshore debt, as the imminent launch of quantitative easing in the single currency bloc sends ripples through global markets.
So far this year, mainland-based companies have sold $2.9 billion worth of euro-denominated debt, according to Dealogic, compared with nothing in the first quarter of last year and within striking distance of the $3.3 billion raised during the whole of 2014.
Meanwhile, Chinese borrowers have shunned offshore renminbi debt, known better as "dim sum" bonds. The total raised in the market this year is only $250 million, a dramatic drop from the $6.6 billion issued during the first three months of last year. US dollar borrowing has been steadily high, with $16.3 billion of bonds sold this year.
Funding costs for euro debt have been tumbling since the European Central Bank announced plans to start its own program of quantitative easing, which is due to begin on Monday. More than €1.5 trillion of sovereign eurozone bonds now offer investors negative yields, according to JPMorgan estimates.
The new focus on euro debt also marks a change in Chinese corporate funding habits, in part a reflection of increasing eurozone assets held by some of Asia's most acquisitive companies. Euro bonds can be used for deal financing or for currency management. In the past six months, the euro has dropped 13 per cent against the renminbi, which has a managed peg to the US dollar.
Beijing-based State Grid, which owns stakes in grid operators in Portugal and Italy, borrowed €1 billion in January. Another euro bond issuer, Fosun International, already owns financial and healthcare assets in Portugal, duty free shops in Greece, and German fashion brand Tom Tailor. It successfully completed a €939 million deal for French holiday resort group Club Méditerranée last month.
"Going out and borrowing in euros is a pretty good way to hedge," said Jon Pratt, head of debt capital markets in Asia at Barclays, adding that many more Chinese companies were expected to tap the euro market in the coming months. "Investors are starting to follow it as an asset class. It's reaching a real critical mass."
Companies from India, South Korea and Hong Kong have also turned to euro debt recently as they look to lower funding costs and diversify their investor base.
A flood of US companies has recently issued debt in euros, including Whirlpool, Kellogg and Coca-Cola. Dealogic says 15 non-financial companies have jointly issued a total of $21.7 billion of such debt so far this year — more than three times the level at the same stage of 2014.
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Meanwhile, yields on offshore renminbi debt have been rising as global investors respond to a weakening of the Chinese currency against the US dollar by demanding higher returns. Two rate cuts from China's central bank have also made it cheaper for companies to borrow at home.
The lack of Chinese issuance is the latest blow for the dim sum bond market, which suffers from poor liquidity, short bond duration and erratic demand. Becky Liu, a credit analyst at Standard Chartered, expects annual offshore renminbi debt issuance to shrink this year by as much as 15 per cent — the first time the market will have contracted since its inception in 2007.
Mr Pratt at Barclays added: "It continues to be a niche market. It will rely on Chinese issuers if it's going to continue growing in a meaningful way."