In the midst of trade war, offshore funding cost of Chinese corporates indeed remained stable

• The uncertainty in the RMB movement and the escalated trade war have shied Chinese corporates away from offshore USD bond issuance during the past month. In fact, issuance in March fell 38% YoY, which pushed down the increase for the whole Q1 2018 to a mild 7% YoY. Conversely, onshore corporate bond issuance has reverted the declining trend to 33% YoY growth for the first quarter.
• Even though US and China are raising the stakes towards a harming trade war, and the Fed hiked rate in March, offshore funding costs of Chinese corporates remained quite stable at 4.85% unlike other asset class in USD which did move up. The movements across different credit ratings also do not deviate much from the stability seen in the aggregate index.
• The real movement comes from the onshore bond market as yields fell sharply by 14 bps to 4.88%, reducing – although not fully eliminating – the attractiveness of offshore USD issuance. Even the onshore-offshore yield differentials narrowed, At a granular level, offshore issuance is still favorable for quasi government agencies regardless of exchange rate and, in the case of financial institutions, for overseas usage (but not so if the proceeds need to used in China).
• With our expectation of a stable (thus strong) RMB, we believe Chinese corporates will continue to issue offshore but at a lesser speed than last year. The onshore market, though, is becoming more attractive as rates have lowered and more demand from abroad should be in the making. This could come from the recently announced inclusion of Chinese government and policy bank securities into Bloomberg Barclays Global Aggregate Index next year. However, USD corporate bond has a role to play as issuers can utilize the cheaper funding and bypass capital controls for overseas business and global investors continue to have appetite for high yield credit.

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