China clamps down on issuance of higher-yielding offshore debt

[SHANGHAI/BEIJING] Chinese authorities are discouraging firms from raising money offshore at higher yields, in the latest step to clamp down on risks among municipal borrowers shouldering more than US$100 billion of overseas bond debt, people familiar with the matter said.

The National Development and Reform Commission (NDRC) has asked select Chinese bankers in recent weeks to avoid underwriting any offshore renminbi notes yielding more than 4 per cent and any US dollar securities yielding more than 5 per cent, according to the people, who asked not to be identified speaking about private matters.

The goal is to cut down on higher-cost borrowing and excessive debt financing especially among local government financing vehicles (LGFVs), they said. There was no immediate response from the NDRC, which oversees Chinese companies’ foreign debt, to a request for comment.

The development marks China’s most recent move to clamp down on excessive debt among LGFVs, off-balance-sheet investment entities that have helped the nation’s towns and cities raise funds for everything from subways to water plants. Defaults in recent years by LGFVs on fixed-income investments that aren’t publicly traded have fuelled further concern, even as they have managed to avoid any debt failures on public bonds so far.

The tighter regulatory scrutiny comes at a time when Chinese companies are staring at about US$71 billion of offshore bonds due the rest of this year, based on data compiled by Bloomberg. The refinancing pressures will intensify further next year, when the maturity wall peaks at over US$130 billion.

Meanwhile, LGFVs alone have a total of about US$117 billion of offshore bonds outstanding overall, according to data compiled by Bloomberg.

Some of the local financing units have already had their quotas for issuing offshore bonds to refinance overseas debt reduced, some by 10 per cent to 20 per cent, the people said.

One state-owned enterprise recently had to resort to borrowing through a more expensive short-term bank loan to fill the funding gap, one of the people said.

Authorities had already been tightening approvals for overseas borrowings, with the NDRC taking four to six months to approve quotas for bonds and loans with tenors of one year or longer, people familiar with the matter had said in April.

SEE ALSO

China securities regulator ordered cross-border swap curbs, sources say

Beijing’s investment clampdown clouds outlook for Hong Kong banks, insurers

In the onshore credit market, regulators have also been taking more steps recently to better manage risks.

The People’s Bank of China is leading an effort to ask rating companies to assess whether some issuers no longer meet updated standards for AAA ratings, in the most concrete step yet to curb the concentration of top-tier ratings in the country’s local bond market, Bloomberg News reported last week. BLOOMBERG