Chinese banks urged to issue more offshore US dollar bonds

HONG KONG • China's central bank is said to have encouraged banks to issue more offshore US dollar bonds at a time of steep declines in the country's foreign reserves, raising supply prospects for the sector.

At a meeting late last month, the People's Bank of China (PBOC) encouraged banks to issue more US dollar bonds, two market sources told International Financing Review. The guidance was verbal and no specific measures were mentioned, they said.

"PBOC's stance was quite supportive (on the issuance of US dollar bonds)," said one of the sources. "In heeding the call, banks will probably issue more US dollar bonds at a faster pace this year."

Financial institutions already account for around half of new US dollar bond issues in China. While the PBOC has not explained its reasons, market participants think it aims to curb yuan depreciation by keeping US dollar outflows within the Chinese financial system. Mainland banks will be able to on-lend the proceeds to corporate clients, while dollar issuance will also offer Chinese investors an alternative to buying wholly foreign securities.

The PBOC guidance follows a drop in China's foreign reserves of nearly US$320 billion (S$454 billion) to US$3.01 trillion last year, on top of a record fall of US$513 billion in 2015, fuelling speculation that the authorities are stepping up the fight against capital outflows at all costs.

"Letting Chinese banks issue more US dollar bonds can help keep the US dollars held by Chinese residents and corporations within the 'China circle'," said a Hong Kong-based fixed income analyst, noting that Chinese money supported most of the US dollar bonds of Chinese issuers. "From the regulators' point of view, declines in foreign reserves will not look so scary if the money remains under the PBOC's control, rather than flowing to the US or Europe," he added.

The PBOC's move did not come as a surprise, as the National Development and Reform Commission, a key regulator of offshore debt, was seen encouraging Chinese issuers to raise offshore US dollar debt last year, during which the yuan fell 6.6 per cent against the greenback.

Another debt capital markets banker at a big Chinese lender said the PBOC's push to encourage banks to sell more US dollar bonds was also meant to support the offshore activities of state-owned enterprises (SOEs), some of which were finding it increasingly difficult to raise funds offshore.

"The PBOC must have known that big Chinese banks are better known internationally and, as such, are able to raise debt at relatively lower cost than most Chinese companies," he said. "Having Chinese banks raise US dollars and lend the proceeds to SOEs for refinancing or M&A (mergers and acquisitions) makes more sense than having SOEs directly borrowing from the international market." He expected new offerings from Chinese financial institutions, predominantly banks, to grow further this year.


A version of this article appeared in the print edition of The Straits Times on January 24, 2017, with the headline 'Chinese banks urged to issue more offshore US dollar bonds'. Print Edition | Subscribe