China: Onshore yields lower, but improved RMB expectations support offshore issuance - Natixis

Alicia Garcia Herrero, Chief Economist at Natixis, points out that Chinese corporates continued to flood the offshore bond market last month and if such trend continues, we shall reach December with double as much issuance as last year.

Key Quotes

“RMB stability and smaller depreciation expectations have clearly helped boosting the offshore market.”

“The issuance in July 2017 is mainly driven by investment grade (IG) corporates (real estate excluded), amounted to 64% of total. This is in line with our expectation that offshore issuance is more attractive for issuers with better credit profile. However, IG financials or quasi-government agencies do not seem to have taken full advantage of the relatively better financial conditions offshore yet.”

“A positive spread between onshore and offshore cost of issuance is still supportive of the offshore market, but less than last month due to rapid reduction in the onshore funding cost. The substantial reduction in RMB depreciation expectations has continued to support the offshore market, at least for funds being reinvested back to onshore.”

“Our take on future offshore market developments is that it should continue to flourish but under two important assumptions: a) Onshore yields do not come down aggressively given the government harsh tone on deleveraging; and b) RMB expectations should remain positive (no sudden change towards fast depreciation). For issuers, we would expect more issuance from financials or quasi-government agencies as their cost of funding is still clearly favorable offshore but not much was issued last month, especially compared with corporates.”