China's Debt Crackdown Helps Revive Flagging Dim Sum Market

(Bloomberg) -- Dim Sum bonds could be returning to fashion, as tougher financing conditions in China and strength in the country’s currency push companies to issue debt offshore.

Sales of the bonds, which are yuan-denominated notes issued offshore, total 54 billion yuan ($8.5 billion) this year, already 17 percent more than all of 2017, data compiled by Bloomberg show. That puts Dim Sum issuance on track to reverse a three-year downtrend from its peak of 298 billion yuan in 2014, before a currency devaluation jolted confidence in the Chinese currency.

“It’s been harder for companies such as developers to borrow onshore -- the queue to apply for bond issuance has been longer this year as authorities slow the pace of approval and curb shadow banking activities,” said Steve Wang, deputy head of research at BOC International Holdings Ltd. “As a result, many Chinese borrowers are being squeezed offshore, and they turn to Dim Sum debt.”

China's Debt Crackdown Helps Revive Flagging Dim Sum Market

Investors are shunning lower rated issuers in China, concerned about the impact of the government’s battle against excess debt. That’s reflected in a growing number of bond sale cancellations, with 13 issuers rated AA or below calling off bond sales this quarter, the most for any such period in two years, data compiled by Bloomberg show. Net borrowing via corporate bond sales turned negative in May for the first time since last June, as more debt matured than was issued.

On the demand side, the yuan’s status as one of the best-performing emerging-market currencies this year has raised the appeal of yuan assets to global funds. The currency fell 0.2 percent this week, paring its gain for the year to 1.4 percent. Repayments of Dim Sum notes are also being reinvested after a record 190 billion yuan matured last year.

Outside Interest

Interest in the bonds from investors outside Greater China bodes well for the market, said Ben Sy, head of fixed income, currencies and commodities at JPMorgan Chase & Co.’s Asia private-banking unit. “That will help demand in the second half to stay reasonably strong.”

Meanwhile, dollar bonds are getting more expensive. The credit spread of Asian high-yield dollar debt over U.S. government notes has widened to the most in two years, an ICE BofAML index shows. Chinese firms issued $85 billion dollar-denominated notes so far this year, compared with $95 billion in the first half of 2017, according to data compiled by Bloomberg.

Read more on cash flow deficit Chinese companies face

The rebound in Dim Sum issuance shows there is demand for yuan bonds outside China even as the country opens up its onshore market. Goldman Sachs Group Inc. analysts Danny Suwanapruti and Andrew Tilton wrote Wednesday that there’s been a “notable improvement” in interest from U.S. investors in Chinese bonds over the past 12 months.

“While a good part of thirst for yuan-denominated assets is absorbed by the onshore market, reflected in strong inflows to onshore bonds this year, some foreign investors still feel more comfortable holding Dim Sum bonds,” said BOCI’s Wang. “We expect the issuance to keep rising in the second half” of this year.

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