Chinese property developers, which used to issue most of their bonds to overseas investors, are turning to the domestic bond market for money as financing at home becomes cheaper and less risky amid liquidity loosening.
According to Moody's, Chinese real estate developers rated by the agency issued bonds worth around 35 billion U.S. dollars between January 1 and October 30 in 2015, and onshore bonds made up about 80 percent of the borrowing. Last year, those developers only issued 1.9 billion U.S. dollars of bonds in the domestic market, which accounted for less than 10 percent of their total bond issuance.
The shift from overseas to the domestic market came as Chinese central bank cut benchmark interest rates, eased banks' reserve requirement and helped reduce overall financing costs with various policy tools.
To combat the economic slowdown, the central bank has cut the benchmark interest rates six times in the last 11 months and lowered banks' reserve requirement ratio five times in the last nine months. The one-year benchmark lending rate has dropped to 4.35 percent from 6 percent since November 2014.
According to Moody's, most of the developers' coupon rates were 4 to 6 percent for bonds with a period of three to five years. These borrowing costs were lower than offshore bonds.
Rated developers have used most of the money raised from this year's domestic bond to refinance their onshore debt, which were mostly in the form of trust and bank loans that carried much higher interest rates than bonds.
"The issuance of onshore bonds is positive for the developers' credit as it lowers average funding costs, enhances liquidity profiles, diversifies funding channels and lengthens debt maturity," said Kaven Tsang, a senior credit officer at Moody's.
One more incentive for Chinese developers to borrow back at home is that they can avoid foreign exchange risks by paying their debt in the yuan, especially as the Chinese currency's depreciation in August still jitters the market's sentiment about the yuan's future move with some analysts forecasting further mild weakness.
In previous years, Chinese property developers scrambled to issue U.S. dollar-denominated bonds as the yuan's consistent appreciation against the U.S. dollar would keep alleviating their debt burden.
However, as the monetary policy divergence between the United States and the rest of the major economies entails an ever stronger U.S. dollar and growing depreciation pressure on other currencies, borrowing in the yuan is less risky for Chinese property developers.
For Chinese property developers, funding through the domestic bond market instead of overseas market will likely become a common practice as subdued investment growth may propel the policy makers to keep loosening liquidity to shore up economic growth in China so that the country's GDP can grow at a medium-to-high speed, which many analysts say will range from 6.5 percent to 7 percent after the outlines of the 13th Five-year plan proposal were published.
While a substantial increase in onshore bond issuance may increase the subordination risks for offshore bondholders, Moody's believes that, for now, as the majority of the onshore bonds were used to refinance other onshore debt, the risk that offshore creditors' claims will be subordinate to onshore claims in a default is unlikely to increase in the next six to 12 months.
