A security guard stands outside the Cnooc headquarters in Beijing. The Chinese firm is selling multibillion-dollar bonds in three tranches, partly to repay borrowings related to its $15.1bn purchase of Canadian oil-sands operator Nexen.
Chinese companies have increasingly turned to foreign investors for financing as domestic credit is getting harder to come by.
That could result in higher borrowing costs for China Inc, which already is facing growing debt burden within the country, due to rising global interest rates and a weakening yuan.
Businesses based in mainland China – led by banks, property developers and energy companies – had a total of $169.2bn worth of outstanding bonds held by investors outside of China last year, up 60% from the previous year and more than double the amount in 2011, according to a new analysis by Nomura Holdings Inc. Many of the bonds are sold in Hong Kong, a Chinese city that operates under its own laws, and in the Caribbean region. Of all the estimated $2tn of Chinese corporate bonds outstanding, about 8% is held by foreigners, the Nomura study shows.
Meanwhile, loans made by foreign banks to Chinese companies reached $609bn in September, up almost two-thirds from the level as of the end of 2011, according to Nomura. That represented about 5% of all Chinese corporate loans outstanding as of September. Investors buying the debt say Chinese corporate bonds are a good bet despite a slowdown in the world’s second-largest economy. The companies tapping international debt markets tend to be in good financial health and are unlikely to default, these investors say. Meanwhile, the bonds often offer bigger yields than similarly rated Western companies.
Chinese Internet company Tencent Holdings on Tuesday sold $2.5bn of bonds after attracting five times as many orders. Cnooc, China’s biggest offshore oil and gas producer by output, and Bank of China, one of the country’s top four state-owned banks, have also been big issuers of debt snapped up by non-Chinese investors, according to Dealogic. Yesterday, a person familiar with the matter said Cnooc is selling multibillion-dollar bonds in three tranches, partly to repay borrowings related to its $15.1bn purchase of Canadian oil-sands operator Nexen Inc.
Tencent declined to comment, while Cnooc and Bank of China didn’t respond to requests for comment.
The surge in foreign borrowing marks a turnaround from the global financial crisis when Chinese companies easily found funding at home while credit was hard to come by abroad. Since the crisis, corporate debt has skyrocketed in China, and the government has tightened credit in the past year, driving companies to look elsewhere. Ultralow interest rates on dollar-denominated debt have been an added attraction.
But with interest rates in countries like the US starting to tick up, and the Chinese yuan depreciating against the dollar in recent weeks, some analysts say Chinese companies may find it more expensive to pay off their foreign debt. Most of the debt is denominated in US dollars.
“This hard-currency debt could become increasingly difficult for borrowers to repay,” said Nomura analyst Jens Nordvig. Given that some of the foreign borrowing isn’t included in China’s official data on external debt, Mr. Nordvig said: “It is important not to overlook the hidden debt.”
China’s foreign-exchange regulator puts the country’s total outstanding foreign debt at $863.2bn as of the end of 2013, representing about 9% of the country’s gross domestic product. That figure understates China’s indebtedness to the rest of the world because it doesn’t include certain debt incurred by overseas subsidiaries of Chinese companies-which are often used by mainland-based firms to borrow funds outside China.
Greentown China Holdings, a property developer based in the wealthy eastern province of Zhejiang, is one of the most active Chinese issuers of bonds for foreign investors. It sold $1.4bn worth of those offshore bonds last year, making it one of the top 10 Chinese sellers of such bonds, according to data provider Dealogic.
“It’s very difficult for us to raise money within China, so we have to turn overseas,” said Simon Fung, Greentown’s chief financial officer.
Fung said the company has used most of the proceeds from the bond sales to pay off existing bank loans that were due within a year. The rates on Greentown’s dollar-denominated bonds, which are due to mature in five years, range between 8.75% and 9%. Rising global interest rates could lead to higher funding costs for the company in the future, he said, “but compared to investment-grade companies, we are more attractive to investors because we offer higher yields.”
Persistent weakness of the yuan, Mr. Fung said, could lead to a “worst scenario” of exchange-rate-related losses, as the company uses more yuan to pay off its dollar debt. “But it absolutely won’t affect our ability to repay the debt,” he added. In addition to offshore bonds, Greentown also has $600mn in loans from foreign banks. In the past, most of the company’s creditors had been Chinese banks.
The yuan has dropped 3% in value against the dollar since the beginning of this year, a rare decline for a currency that has appreciated steadily for much of the past decade. China’s slowing economic growth, some analysts say, could pressure Beijing to let the yuan fall further as a way to help troubled exporters and boost growth.
China Inc’s foreign debt still pales in comparison to the size of the country’s more than $9tn economy. Beijing put limits on Chinese companies’ ability to borrow overseas in the aftermath of the 1997-1998 Asian financial crisis, leaving many Chinese companies to rely on their foreign subsidiaries for the external borrowing.
Scott McKee, the lead portfolio manager for the emerging-markets corporate bond team at JP Morgan Asset Management, said China’s economic growth – albeit slower than in recent years – is still “very good in an absolute sense.” The Chinese government, meanwhile, has “done a good job managing macroeconomic risks in the past,” he said.
The $1.8bn JP Morgan Emerging Markets Corporate Bond Fund holds more Chinese corporate debt than suggested by benchmark indexes, McKee said. Its seventh-largest holding as of March 31 was Chinese search giant Baidu Inc, which carries an A3 rating from Moody’s Investors Service.
Still, the jump in Chinese companies’ foreign debt is raising concerns among economists that rising borrowing costs could augur weaker corporate profits and slower economic growth.
“The speed of the increase (in foreign borrowing) is a concern,” said Stephen Green, chief China economist at Standard Chartered Bank.
Mark Yu, an analyst at Invesco who helps oversee the $147mn Invesco Emerging Market Corporate Bond Fund, said the fund’s exposure to Chinese corporate bonds has been reduced relative to the benchmark in the past year. Yu cited the slower growth.
Yu said the fund is more cautious on Chinese companies with ratings in the single-B range or below, which carry higher yields but more risk.
