Dollar bond issuance is booming across Asia, but issuance by Chinese corporates is slowing to the lowest level in years. S&P Global Ratings believes this is largely due to Chinese government efforts to rein in leverage post-COVID, which could help issuers face rising risks from the reversal of "lower for longer" rates.

For years, Chinese corporates were able to issue lower-cost overseas debt at the same or longer tenors. Now, as global rates trend the other way, they face the prospect of refinancing these debts with higher-cost, shorter-dated bonds. In just the past three years, their average dollar financing costs have fallen by 100 basis points (bps) to 300 bps (see table 1). A full reversal could have a material hit, particularly if the transition is disorderly or over a short timeframe.

Excessive leverage can make issuers more vulnerable when rates rise. Chinese policymakers seem to be cautious of this, judging by the emphasis on leverage containment as the government shifted its focus to tightening from stimulus while the country recovered from the COVID-19 crisis.

Although issuance has slowed for key sectors in China such as real estate and central government state-owned enterprises (SOEs), it has not for local government-owned SOEs. This divergence is in line with our view that China is not a monolithic bloc when it comes to policies. That said, we may see more central government measures on the country's local SOEs, particularly if defaults in this segment continue to outpace other sectors.

Issuance Boom Belies a Nuanced Picture

Headline numbers point to an issuance boom in Asia. Year to date, issuance of global bonds in Asia excluding Japan total US$116 billion, which exceeds this time last year by nearly a quarter (22%) and is higher than pre-COVID levels in 2019 (see chart 1).

This strong overall growth belies a much more nuanced underlying picture. The boom in issuance volumes so far this year was almost entirely driven by investment grade (IG) and by North Asia (see chart 2, roughly 60% Korea, 40% Hong Kong excluding mainland-based issuers).

Historically low rates motivated more debt issuance. Caution under COVID drove preference for higher credit quality. Together, these conditions help explain why investment grade issuance outpaced the rest of the market. Yet, while this is true across Asia, it is not for China.

Growth In New Paper Driven By Investment Grade Issuance

Total global bond issuance year to date 2021 versus same period 2020 and 2019 

Chart 1a

Chart 1b

Chart 1c

Although most countries in the region kept pace with last year in the first month of 2021, they started to diverge thereafter. China fell behind, North Asia raced ahead and South and Southeast Asia (SSEA) caught up (see chart 2). What are the key drivers behind these differences? Rates and policies, in our view.

China Slows, North Asia Races Ahead, South And Southeast Asia Catches Up

Total global bond issuance year to date 2021 vs. 2020 and 2019 

Chart 2a

Chart 2b

Chart 2c

Asian Issuers Rush To Catch Low Rate Window

Where there is no overt government discouragement, investment grade issuance boomed this year. This is particularly true for the more opportunistic issuers in North Asia, who tend to issue when rates are low and market conditions are welcoming.

Many IG issuers in North Asia seem to have taken the initial signs of the rate cycle reversal--as reflected in higher U.S. government and corporate yields--as a cue to issue more before the window closes. This, combined with greater needs for capital and liquidity support against the pandemic's pressures, drove that geography's IG issuance to more than double vs. 2020, and to exceed pre-pandemic levels by 57% (see chart 3)--amounting to the largest increase across all sectors in Asia.

While IG issuance in South and Southeast Asia did not see such a dramatic increase, volumes there are catching up to last year and are nearly at pre-COVID levels in 2019 (see chart 3).

Some speculative-grade issuers were also able to take advantage of these conditions, but the lesser increase versus IG reminds us that idiosyncratic, or company-specific risks remain high, and funding access is uneven across large parts of Asia-Pacific.

Chart 3

Chinese Corporate Issuance Slows Against The Tide

While Asian corporates rushed to take advantage of the last low rates window to meet their post-COVID needs, Chinese companies largely stood back. We attribute this behavior to government policies.

The most notable slowdown in issuance this year is in China's real estate sector, where the government guided lenders to heighten caution in lending and instituted overt leverage containment measures such as the "three red lines" (see "China Property Watch: Issuers Go On A Debt Diet," Nov. 12, 2020).

China Property And Central SOE Issuance Slows As Government Reins In Leverage

Total global bond issuance year to date from China quasi-sovereign/banks/financials; central SOEs; and real estate issuers 

Chart 4a

Chart 4b

Chart 4c

As a result, many developers front-loaded issuance at the start of this uncertain year and slowed volumes precipitously thereafter to the lowest level in three years (see chart 4). Prominent defaults, such as by China Fortune Land Development Co. Ltd. in February 2021, compounded the drag on issuance and led investors to become even more selective.

Meanwhile, China's major SOEs also heeded the government's repeated public statements on controlling leverage, issued by the State-owned Assets Supervision and Administration Commission of the State Council, the body that oversees SOEs owned by the central government.

This helps explain why these mostly investment grade rated entities are doing the opposite of their IG peers in the region. China's central SOE issuance has slowed dramatically in the first two months of 2021, and remains behind this time last year despite conducive conditions that helped propel IG issuance elsewhere.

Less Discouragement, More Issuance

Chinese corporates that are not directly required or guided by the central government to rein in leverage are behaving more like their regional peers.

China's privately owned IG issuers doubled issuance year on year to nearly pre-COVID levels (see chart 5). These largely comprise China's tech giants, which are lower-levered and rated in IG categories ('A+' to 'BBB-'). Such issuers have not attracted as much government attention on leverage, even though other aspects of their operations, such as internet financing, came under greater scrutiny.

Less Government Direction, More Issuance in China

Total global bond issuance year to date from quasi-sovereign/banks/financials; central SOEs; and real estate issuers 

Chart 5a

Chart 5b

Chart 5c

Speculative-grade issuers outside the property sector have not faced overt leverage containment measures or direct anti-leverage guidance like those for real estate. Their issuance rose nearly a third year on year (29%) and is quickly catching up to their pre-COVID levels in 2019.

Local government SOEs slowed their pace of issuance in early January and February (see chart 5) under recent default events at China Fortune land and Chongqing Energy (see "China Defaults Flag Provincial Risks," March 11, 2021). However, stabilization thereafter has allowed stronger issuers not associated with those events to access the market. Their issuance began to outpace last year in the past month.

This divergence in SOE borrowing trends could be due to uneven adoption of central guidance at the local level, a theme that has surfaced from time to time in China's decades-long reform experience. While it is unclear if this will persist, continued divergence could attract more central government scrutiny of local SOE debt levels.

The Reversal of 'Lower for Longer' Will Bring Risks

The significant drop in Chinese corporates' overseas borrowing rates in just the past few years implies that a full reversal to prior year levels could materially worsen issuers' financing costs and market access (see table 1).

As tenors generally extended since 2019, average interest rates (coupons) on new issue dollar bonds dropped nearly 200 bps on average for central SOEs, to 1.9% from 3.6%, and 90 bps for property developers, to 7.8% from 8.7%. The former generally borrows in seven-year tenors, while the latter, in three-year tenors. That other corporates in China and elsewhere in Asia saw a similar 100bp-200bp drop in rates, whether in IG or speculative grade, indicate that associated risks extend well beyond these sectors and well beyond China.

What are the risks? As global rates rise under a turning rates cycle, issuers could face higher dollar financing costs, particularly for longer-dated debt, where rates may rise faster as yield curves steepen. The result: a rising mismatch of refinancing lower-cost, longer-term debt raised earlier in the cycle with higher-cost, shorter-term debt raised at the later part of the cycle.

If proceeds from earlier issuance was not invested effectively or at all (e.g. used for dividend payouts or share buybacks), there may be less ability to refinance now and reduced cash flows to repay than if the funds were better invested.

These risks can be lowered before the rate cycle fully turns if the pace of debt cumulation slows or reverses under issuers' deleveraging effort, whether undertaken on their own or due to external guidance or requirements.

Table 1

Risks Of Disorderly Adjustments

We do not expect a rapid and volatile market repricing of rates this year (see "Orderly Global Reflation Will Support The Recovery From COVID-19," March 22, 2021). However, we recognize the risks given years of low rates, even before the global stimulus under COVID-19. While a gradual transition over multiple years could moderate the resulting impact, a few recent episodes of rates adjustments have stoked investor concerns and unexpected volatility, reminding us that these risks remain on the horizon. In our view, disorderly adjustments would hit hardest the corporates at the lower end of the credit spectrum, and in some emerging markets.

In this context, we see the deceleration in issuance in some sectors as a positive for Chinese corporates over the medium term. Related policies and requirements, if given reasonable timeframes for adoption, should help reduce the risk of disorderly adjustments as the rate cycle turns.

Related Research

• China Defaults Flag Provincial Risks, March 11, 2021
• Orderly Global Reflation Will Support The Recovery From COVID-19, March 22, 2021
• China Property Watch: Issuers Go On A Debt Diet, Nov. 12, 2020