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Chinese companies miss out on bond bonanza as yuan weakens

Fearing costly repayments, dollar-denominated bonds shrink 80% in August

SHANGHAI/NEW YORK -- Chinese corporations have sharply reduced their issuance of dollar-denominated bonds since the yuan began its rapid depreciation this summer, on concerns that the weaker currency will increase the repayment burden. 

This comes at a time when American and other companies revel in a bond bonanza to take advantage of low interest rates.

Chinese enterprises floated $800 million in dollar bonds this August, about 80% below the monthly average for the past year. September's issuances had totaled a little over $1.8 billion as of Thursday, according to market information provider Refinitiv. The data, covering companies with headquarters on the mainland or in Hong Kong, apparently showed the effects of the yuan's slide since late July.

This means that Chinese companies are missing out on a market receptive to new-bond issuances in the U.S., where even enterprises with ample cash flow are also trying to catch the windfall following rate cuts by the Federal Reserve.

Earlier this month, Apple borrowed $7 billion in its first bond issuance in almost two years. This includes $1.5 billion in 30-year bonds with a coupon rate of 2.95%, compared with the 3.75% rate on which it issued 30-year notes in 2017.

Coca-Cola, Walt Disney and Blackstone are also among the companies that have issued fresh bonds this month.

The Shanghai headquarters of China Minsheng Investment Group, which postponed the repayment of dollar bonds.

The Chinese currency weakened past 7 to the dollar in August, at one point hitting an 11-year low just shy of 7.2. It has softened 13% from its high in the spring of 2018. Although the yuan has recovered somewhat in September, speculation of weakening has not disappeared.

Since 2018, the yuan has been sold when China-U.S. relations have soured. Market speculation is that if October's ministerial-level trade negotiations fail, the Chinese leadership led by President Xi Jinping will let the yuan weaken further to shore up exports.

Hong Kong-listed Socam Development said Tuesday that it will not proceed with a proposed issuance of dollar bonds. The real estate developer gauged demand for two-and-a-half-year bonds with a 6.2% rate but reported unfavorable market sentiment.

Socam swung to the black for the January-June half with a net profit of just 11 million Hong Kong dollars ($1.4 million). The company operates largely on the mainland, so investors wanted to see the progress of projects in Tianjin and Sichuan Province. In July, state-backed Tianjin Binhai New Area Construction & Investment Group postponed the issuance of dollar bonds.

Almost $18 billion in dollar bonds floated by Chinese corporations will mature in the October-December quarter, according to Refinitiv. Chinese businesses had sharply boosted such issuances up until a few years ago to take advantage of low U.S. interest rates and a strengthening yuan. Redemptions have yet to peak, with almost $35 billion maturing in 2020 and roughly $32 billion in 2021.

Investors are also growing more selective about Chinese instruments, according to a bank official, because of frequent defaults.

Defaults on yuan-denominated corporate bonds had surpassed 90 billion yuan ($12.6 billion) this year as of mid-September, on track to match 2018's full-year record of slightly more than 120 billion yuan. Defaults on dollar bonds have put investors on guard.

China Minsheng Investment Group could not gather funds to repay $500 million in dollar bonds that matured in August. Creditors agreed to a one-year extension, but questions have been raised over its ability to repay other debt denominated in yuan.

Regulations on real estate companies are having an impact. Regulators said in July that funds raised through the issuance of foreign-currency bonds can be used only to repay foreign bonds maturing within a year. Companies also must submit detailed information on existing foreign-currency-denominated debt, part of an effort to reduce the risk of market turmoil when bonds mature.

A tougher environment for issuing corporate bonds would hurt financing by businesses. If they press ahead with issuances, interest payments would weigh on earnings, as some real estate companies need to pay more than 10% in interest. The Chinese economy faces a growing risk of being depressed by concerns over credit stemming from a weaker yuan and excessive debt.

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