Stimulus cushions Chinese companies

BEIJING • Stimulus unleashed by China's central bank will cushion Chinese companies - the region's biggest dollar debt issuers - from a potential Federal Reserve interest rate increase, making cheaper yuan funds available.

Five interest rate cuts by the People's Bank of China (PBOC) since November and rules to relax yuan bond issuance onshore mean Chinese companies are becoming less reliant on dollar funding.

Corporates in China have some US$303 billion (S$426 billion) in dollar-denominated bonds outstanding and will face higher costs to issue more such notes, or repay them in yuan, if the US central bank tightens monetary policy.

"Fed rate hikes would imply that the cost of borrowing offshore debt will be higher, assuming the same credit spread," said Mr Raymond Chia, the head of credit research for Asia ex-Japan at Schroder Investment Management in Singapore.

"But given the PBOC is relaxing measures and cutting rates, more issuers would consider raising funds onshore as onshore funding costs are getting cheaper."

The shift to yuan funding is already happening, with domestic corporate bond sales jumping 77 per cent to 7.85 trillion yuan (S$1.7 trillion) in 2015 from the same period last year, according to data compiled by Bloomberg.

Dollar offerings from Chinese companies fell 17 per cent to US$117.2 billion. It is a contrast to 2013, when the Fed's "taper tantrum" saw Chinese companies mostly shut out of the US currency market for about three months while yuan borrowing costs were higher than current levels.

Last month's yuan devaluation by the PBOC could also stoke demand from wealthy Chinese for dollar assets because the US currency is still on a rising path, said Mr Ben Sy, the Hong Kong-based head of Asia fixed income, currencies and commodities at JPMorgan Chase's private banking unit.

That could alleviate the negative impact on Chinese dollar bonds if a Fed rate increase boosts market volatility, he said.

The yuan may depreciate to 6.5 per dollar this year and to 6.8 next year, according to forecasts by senior analyst Liu Dongliang, of China Merchants Bank. The currency was 6.369 per dollar yesterday.


A version of this article appeared in the print edition of The Straits Times on September 16, 2015, with the headline 'Stimulus cushions Chinese companies'. Print Edition | Subscribe