Chinese banks told to issue dollar-denominated debt-sources

HONG KONG, Jan 23 (IFR) - China’s central bank is said to have encouraged banks to issue more offshore US dollar bonds at a time of steep declines in the country’s foreign reserves, raising supply prospects for the sector.

The People’s Bank of China (PBoC) encouraged banks at a meeting late last month to issue more US dollar bonds, according to two market sources. The guidance was verbal and no specific measures were mentioned, they said.

“PBoC’s stance was quite supportive (on the issuance of US dollar bonds),” said one of the sources. “In heeding the call, banks will probably issue more US dollar bonds at a faster pace this year.”

Financial institutions already account for around half of new US dollar bond issues in China. While the PBoC has not explained its reasons, market participants think it aims to curb renminbi depreciation by keeping US dollar outflows within the Chinese financial system. Mainland banks will be able to onlend the proceeds to corporate clients, while dollar issuance will also offer Chinese investors an alternative to buying wholly foreign securities.

The PBoC guidance follows a drop in China’s foreign reserves of nearly $320 billion to S$3.011 trillion last year, on top of a record fall of $513 billion in 2015, fuelling speculation that authorities are stepping up the fight against capital outflows at all costs.

“Letting Chinese banks issue more US dollar bonds can help keep the US dollars held by Chinese residents and corporations within the ‘China circle’,” said a Hong Kong-based fixed-income analyst, noting that Chinese money supported most of the US dollar bonds of Chinese issuers.

“From the regulators’ point of view, declines in foreign reserves will not look so scary if the money remains under the PBoC’s control, rather than flowing to the US or Europe,” he said.

The PBoC’s move did not come as a surprise, as the National Development and Reform Commission (NDRC), a key regulator of offshore debt, was seen encouraging Chinese issuers to raise offshore US dollar debt last year, during which the renminbi fell 6.6 percent against the greenback.

Cost does not appear to be the primary concern for either regulators or Chinese issuers. Local government financing vehicles (LGFVs), for example, raised S$7.59 billion in the offshore market in 2016, even though most had no overseas operations and domestic funding costs were lower for most of the year.

Compared to LGFVs and most Chinese companies, banks, especially the big four, are believed to have wider appeal to investors in search of US dollar assets - thanks to their higher ratings.

Therefore, banks are considered to more effective vehicles to attract US dollars from Chinese investors looking to invest in offshore assets. FOREIGN FUNDING Another debt capital markets banker at a big Chinese lender said the PBoC’s push to encourage banks to sell more US dollar bonds was also meant to support the offshore activities of state-owned enterprises (SOEs), some of which were finding it increasingly difficult to raise funds offshore.

“The PBoC must have known that big Chinese banks are better-known internationally and, as such, are able to raise debt at relatively lower cost than most Chinese companies,” he said.

“Having Chinese banks raise US dollars and lend the proceeds to SOEs for refinancing or M&A makes more sense than having SOEs directly borrowing from the international market,” he said.

He expected new offerings from Chinese financial institutions, predominantly banks, to grow further in 2017.

“On the most conservative estimate, I’d say the growth will be 10% over the volume of last year. In a moderate estimate, the rate will be 30%,” he said.

Earlier this month, China Development Bank printed a large offering of multi-tranche bonds in US dollars and euros, becoming the first Chinese bank to tap the offshore market this year.