NATIXIS China Offshore Bond Monitor：Offshore-onshore yield differentials narrowed sharply with a dovish FED and a prudent PBoC

• Offshore USD bond yields of Chinese firms fell 42 bps to 4.63% in Q2 2019. The synchronized yield decline across all entities continued with the most decrease stemming from private firms and quasi-government agencies. However, credit spread has widened with market concern of default risks. 
• Net issuance rebounded for all entities except for state-owned firms. The low onshore yields and abundant liquidity mean it was attractive and easy for SOEs to secure onshore liquidity. For other issuers, net issuance of private firms remained elevated and strong rebound was seen from financial institutions and local government financial vehicles (LGFVs) due to the lower yields.
• Although sentiment was worsened due to the spillover effect from rising onshore defaults, the comeback of investment grade names to the offshore market has helped easing upward pressure of the aggregate yield. It reflects the move by the Chinese regulators to control external debt risk but firms with better credit quality will still be allowed to issue offshore bonds. For high yield issuers, tougher approval process could lead to more short term bond issuance in the future. The condition will be even more severe for property developers, the largest portion of offshore bonds, as new regulations only allow refinancing of bonds maturing in one year.
• Offshore issuance rebounded from -12% YoY in Q1 2019 to 51% YoY in Q2 2019, while onshore issuance decelerated from 50% YoY to 9% YoY for the same timeframe. But net issuance remained elevated for both markets, indicating funding need is high for Chinese firms. Offshore-onshore yield spread narrowed sharply from 70 bps in Q1 2019 to 29 bps in Q2 2019. While a dovish FED compressed offshore yields, the prudent onshore liquidity injection by the People’s Bank of China (PBoC) has resulted in unchanged onshore yields.

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