Corporate China braces for credit crunch as onshore bond issuance shrinks

HONG KONG (Reuters) - Chinese companies are facing a credit crunch over the coming months as a shrinking domestic bond market and pressure on banks to clean up leave firms grappling to refinance $130 billion of debt that comes due this year, and $248 billion more in 2018.

China’s onshore bond market boomed last year, growing by a third in volume. But in the first four months of this year, with tighter rules and rising yields, bond issuance volumes have slumped to less than a fifth of last year’s levels. At the current pace, the domestic Chinese market would barely cover the required volume that comes due in 2018.

That spells trouble for smaller firms without access to offshore markets, and for sectors where bankers report a tempering in lending to cyclical firms and those in smoke stack industries where Beijing is cutting capacity.

The squeeze on the onshore bond market stems from capital controls, shadow banking crackdowns and tightening by the central bank.

The loan numbers speak for themselves.

In March, China’s banks made 1.02 trillion yuan in new loans, but that is down from 1.17 trillion in February and 2.03 trillion in January, the second-highest monthly tally on record.

“There is a wave of debt repayments due between the second quarter of 2017 and the first quarter of 2018, representing about two to three times the amount currently being issued each quarter,” said Cedric Rimaud, analyst at Gimme Credit.

“Stress in the debt market is starting to appear. A number of defaults have already happened and we expect that there will be more this year,” Rimaud said.

Goldman Sachs estimates defaults grew from 1 billion yuan in 2014 to 18 billion in 2015 and to 53.9 billion last year.

Part of the reason for the build up is the inclusion of put options in many of the bonds - with rising yields, investors are taking advantage of the option to sell back their paper to the issuer at face value.

Analysts estimate that the current volume of puts exercisable amount to 10-15 percent of the average issuance.

Since last October, average 5-year bond yields for top rated companies AAACNYD5Y= are up 200 basis points to about 5 percent.

“Investors are demanding higher yields as they see further money market rate hikes in China and uncertainties on regulatory tightening,” said Kun Shan, BNP Paribas China strategist.

“Since November last year credit markets have been dysfunctional given the sharp rise in interest rates and volatile funding market, factors which have hurt demand.”

He said if this continued for another quarter it would be difficult for corporates under most pressure, such as cyclical sectors, private-owned entities and overcapacity industries, to get funding.

According to Thomson Reuters estimates, bondholders with holdings of $49 billion have the right to put their bonds this year. For next year it is $87 billion.


Onshore bond issuance volumes collapsed in the first four months of the year to around $132 billion from $796 billion a year ago, according to Thomson Reuters estimates. Deutsche Bank estimates China’s domestic bond market, grew by 32 percent from 2015 to $9.3 trillion at the end of 2016.

While the onshore market shrinks, the offshore debt market has boomed: in the year to date, companies have raised $55 billion, which is more than half of last year’s record total.

But that option won’t be open to everyone, as offshore investors demand sky-high premiums for weaker borrowers.

Matthew Phan, banking analyst at CreditSights in London, said that in January and February 2017 the contribution of local government and corporate bond issuance to net new financing slid to zero from over 40 percent in 2016.

That funding gap has been filled by shadow lending, he said.

“It is important for China to re-open the corporate bond market,” Phan said, referring to the collapse in the onshore debt market.

“Allowing rates to rise further would be a risk to onshore corporate bond financing, and thereby credit growth, and ultimately economic growth.”

($1 = 6.8961 Chinese yuan renminbi)

Graphic: China onshore bond issuance shrinks, squeezing some corporate borrowers -

Reporting by Umesh Desai; Editing by Shri Navaratnam