Hong Kong’s dim sum bond market heats up again as China default risks rise

Chinese issuers have started returning to the long-forgotten offshore renminbi bond market after a lapse of five months as uncertainties rise in the onshore bond market and Beijing strengthens measures to check capital outflows.

Shenzhen-based property developer Fantasia Holdings on Wednesday announced it would issue 600 million yuan of senior notes due 2019, with a coupon of 9.5 per cent. This is the first offshore renminbi bond in Hong Kong, popularly known as dim sum bond, to be issued by a Chinese company this year.

Because of ample liquidity in China, lower cost of raising funds and yuan's devaluation, capital-intensive Chinese real estate firms – the main issuers of dim sum bonds as well as offshore dollar bonds – had shifted to the domestic bond market in the second half of last year. As a result, just five dim sum bonds were issued by Chinese developers last year, compared with 15 in 2014, shows Dealogics data.

But there are signs bond issuers are beginning to head in the other direction.

"It is getting hard to bring money from onshore to offshore," said the chief financial officer of a Hong Kong-lised mainland Chinese developer who did not want to be identified.

Chinese financial regulators have tightened controls on cross-border outflows this year to prop up the yuan amid slowing economic growth and rising strains on the financial system as a result of the debt overhang on the banking sector.

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"(Taking money overseas) takes longer for regulatory approval and involves extra costs," said Moody's assistant vice-president and analyst Stephanie Lau.

The demand for offshore bonds has been strong recently due to adequate liquidity, she said, adding that Fantasia is tapping the market at the right time as it needs offshore yuan to refinance existing offshore debt due this year.

Standard & Poor's Ratings assigns B long-term rating to Fantasia's dim sum bond, while Moody's assigns B3 senior unsecured rating.

Annisa Lee, regional head of credit analysis at Nomura, said market volatility is seen to be greater in China's onshore corporate bond market at present due to rising defaults, which has led developers to return to offshore financing. Defaults by Chinese companies have accelerated this year, triggering a sell-off in onshore bonds.

JP Morgan estimates corporate bond defaults had risen from 10 billion yuan at the end of 2015 to 40 billion yuan by April 26.

Last month, Yunfeng, a 20.5 per cent owned affiliate of major Chinese developer Greenland Group, was reported to be in default of 2 billion yuan of privately placed notes in January.

Lee said Chinese domestic investors are increasingly worried about defaults and becoming more careful with their money, especially when it comes to lending to smaller companies. "More Chinese companies are likely to tap the offshore bond market this year, issuing both dim sum and dollar bonds," she said.

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