NATIXIS China Onshore and Offshore Bond Monitors

NATIXIS China Onshore Bond Monitor

Onshore bond market remains hot for foreign investors, but the magnet of yield differentials is fading

• Although economic growth accelerated in Q4 2020, interest rates in China have remained rather stable, pointing to a neutral monetary policy stance.
• Onshore bonds with repayment pressure further climbed in 2020 but the overall proportion is diluted by the rapid net bond issuance until recently. This means the share of onshore bonds under repayment pressure declined from 0.57% in 2019 to 0.54% in 2020. The major sources of bond defaults by value now come from SOEs, in line with the faster deterioration of corporate health versus private firms.
• Net onshore bond issuance surged massively in Q3 2020 and returned to average level in Q4 2020. The major net bond issuance comes from banks and LGFVs. With the neutral monetary policy and the recently much lower net bond issuance, yields have started to come down.
• In order to manage financial risks amid an uncertain economic environment, the People’s Bank of China (PBoC) is unlikely to soften its policy stance, nor will it tighten it further. Given the softer net supply of bonds, onshore yields should come down. Externally, higher yields in the US driven by the $1.9 trillion fiscal stimulus and the potentially stronger USD. Given the rapid increase in US treasury yields, it might become harder to attract inflows in a scale as large as last year into Chinese underlying in 2021.

NATIXIS China Offshore Bond Monitor

Bond yields zigzag as better corporate revenue collides with increased number of defaults

• While the 10-year UST has climbed recently, the movement in offshore yields for Chinese firms is limited.
• Offshore bonds with repayment pressure have climbed in 2020, showing the higher credit risk due to the pandemic and the aftermath for firms with excessive leverage. Unlike the past years, SOEs have overtaken private firms in the value and the ratio of offshore bonds with repayment pressure, reflecting their general deterioration of corporate health. Still, the higher yield USD bond default rate in China is still lower than global peers with clear concentration in a few names with large size.
• USD gross and net bond issuance lost steam in Q4 2020 with the only net addition coming from private firms. Funding costs for Chinese firms issuing USD bonds fell 15 bps from 3.86% in September 2020 to 3.71% in December 2020 following a zigzag pattern. Funding costs for quasi-government, banks and investment grade corporates have been stable while volatility is seen in private firms, especially driven by real estate.
• Sentiment on real estate firms is bolstered by better revenue but dragged by tougher regulations. Contracted sales value for private property developers rebounded from 6% YoY YTD in September 2020 to 12% in December 2020. State-owned property developers are clearly lagging but still improved from -3% YoY YTD in September 2020 and 6% YoY YTD in December 2020. The “three red lines” should continue to push real estate developers to reduce leverage as the regulators attempt to manage financial risks, which imply liquidity stress for firms with less sound financial conditions and more consolidations in the sector.

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