More Chinese property developers are using the domestic bond market for cheaper funding than offshore bond issuance, ratings agency Standard & Poor's said in a report on Thursday.
The agency said that about a dozen developers it rates have issued domestic bonds up to 70 billion yuan this year and such funding is increasingly popular among smaller developers with lower ratings.
"Tapping the onshore bond market is positive overall on the developers' credit profiles," said Standard & Poor's credit analyst Christopher Yip.
He added that the impact is more pronounced for small and mid-sized developers struggling with high funding costs and limited access to funding from banks and the offshore bond market.
The advantages of a domestic bonds include lower funding costs and zero exchange risks as bonds are denominated in yuan rather than the U.S. dollar as in some offshore bond issues.
Yip said the onshore bond market will remain appealing to smaller developers as long as issuance costs stay low, especially at a time when the market expects rising U.S. interest rates.
Though ranked as the world's third largest bond market, China's bond market is still underdeveloped in issuance structure and legal framework, Standard & Poor's said. Default has been mostly avoided as government and state-backed institutions feel compelled to rescue distressed issuers at the last minute out of fear of risk contagion.
"Many investors continue to assume a high level of implicit support from the government, as shown in the narrower range of credit rating and pricing differentiation," Yip said.
