Solid offshore bond issuances likely this year
Citigroup expects instruments to exceed $220b in foreign currencies overseas
China will see strong issuance of offshore bonds this year, although investors may continue to see sporadic bond defaults, which will not affect sound development of the overall market, said Citigroup.
"Default rates of China's bonds issued offshore were fairly low in the past, and the interest rates basically remained at a historically low level, so the impact of defaults on the country's dollar bond issuance in the offshore market is very limited," said David Mao, managing director of Asia debt capital markets at Citi.
Last year, the volume of China's bonds issued overseas in foreign currencies reached $220.4 billion, hitting a high in recent years, according to data from Citi, Bloomberg and Dealogic.
In the same year, 13 Chinese companies defaulted on bonds in the offshore markets, worth a combined $8.2 billion, Bloomberg reported on Thursday. The combined value of defaults accounted for 0.9 percent of the outstanding amount of the country's total offshore bonds, worth $909.3 billion.
"Compared with the onshore market, the offshore market-which has many levels of credit ratings and a better risk structure system-is more mature in terms of the level of acceptance for bond defaults and how to settle and handle defaults. Therefore, the defaults did not cause excessive fear among investors in the offshore market," Mao said.
"Investors in the international bond market have been holding onto the mindset of 'let the buyer beware' for many years. They are fully aware of risk factors when making investments in dollar bonds. Some investors are willing to take more risks so that they may get higher returns," he added.
The trailing 12-month high-yield nonfinancial corporate default rate for Asia-Pacific will be 3.6 percent at the end of this year, down from 7.3 percent in 2020, under Moody's Investors Service's baseline scenario of economic recovery in Asia and continued fiscal and monetary policy support, said the credit rating agency in a report on Thursday.
"We expect APAC as a whole to register faster economic growth-led by China-when compared with other regions, as the early containment of COVID-19 in major Asian economies has allowed resumption of manufacturing and daily activities, alleviating economic disruptions and in turn supporting corporate earnings," said Clara Lau, a Moody's senior vice-president and group credit officer.
"Specifically, we forecast China's GDP will grow 7 percent in 2021, which will have positive spillover effects for the rest of Asia through trade and supply chain channels," Lau said.
Citi estimated that the country's GDP will grow 8.2 percent this year, and its offshore bond issuance in foreign currencies will continue to increase during the same period.
"Because of the low interest rate environment and sufficient liquidity this year, and considering that nearly $200 billion of China's offshore dollar bonds will reach maturity this year, the value of China's bonds issued overseas in foreign currencies may exceed $220 billion," Mao said.
"If interest rates of bonds issued onshore are on the rise, we expect to see a growing number of issuers taking advantage of the low interest rate environment offshore and building financing channels overseas to increase long-term funds," he added.
Last year, Citi served as an underwriter for over $60.9 billion in bonds issued offshore by nearly 70 Chinese issuers. It shows that investors in global capital markets have confidence in a Chinese economic upturn in the long run, according to the financial conglomerate.
Looking ahead, the issuance of environmental, social and corporate governance-themed, or ESG, bonds will become an important focus as Chinese companies expand globally, Mao said.
Last year, China issued $8.9 billion of ESG bonds overseas, accounting for 4 percent of the volume of China's offshore bond issuance in foreign currencies. The percentage is expected to increase to 10 percent in the next few years, he said.
"As international investors have raised the requirements for ESG, and credit rating agencies are placing greater emphasis on ESG-related risks, Chinese companies must follow international standards and play by the rules to boost their own development. Otherwise, they will find increasingly less opportunities to receive investments in the global market," Mao added.