Most emerging economies don’t have developed bond markets, which forces corporates to rely heavily on bank loans. This poses a risk for the banking sector.
When faced with poor domestic conditions, companies can issue bonds offshore to obtain long-term funds from the far-more-liquid international market.
That is the theory. However, the Asian financial crisis in the late 90s prompted market participants and scholars to rethink the risks of offshore financing.
That is not surprising as the crisis exposed the danger of excessive borrowing of offshore funds and the mismatch in tenure and currencies, particular to economies with structural imbalance.
Some academics are also skeptical about the merit of offshore financing, pointing out that the main incentive of such deals seems to be the arbitrage in interest rates and exchange rates.
China has always been cautious about allowing companies to issue bonds offshore as it sought to avoid high external debt and the potential threat to the stability of its financial system.
As a result, many Chinese companies have set up offshore subsidiaries, shell companies or holding companies for issuing foreign currency debt in the offshore market to circumvent stringent controls at home.
But in recent years, as Beijing has begun to encourage mainland enterprises to go out and seek investment opportunities in foreign countries, authorities have become more supportive of overseas borrowing activities.
In July 2012, the government issued a new policy to support privately owned Chinese firms to issue debt either in yuan or foreign currencies offshore to widen offshore financing channels.
In 2015, China’s offshore bond issuance volume exceeded US$130 billion, of which over 80 percent was denominated in US dollar. Banks, property developers and financial firms are top three categories of issuers, together accounting for 60 percent of the total issuance.
Well-developed offshore markets have enabled low-cost funding for Chinese companies. Non-financial firms with rating above BBB+ can issue five-year bonds at 3 percent, compared with over 6 percent in onshore market.
Offshore financing has ensured cheap funding to Chinese firms and reduced financing costs for the real economy.
The overseas financing activities also brought some important changes to the domestic credit market.
International rating agencies keep a close tab on the creditworthiness of Chinese borrowers, in contrast to a relatively easy stance adopted by the domestic agencies.
The monitoring by global agencies makes it easier to track the quality of the borrowers. Amid this situation, quality names will have better access to the international markets and can also boost their profile in the domestic market.
Companies that are able to raise funds from global markets usually perform better than those which solely depend on domestic financing sources.
A study conducted by us has shown that firms that resorted to overseas financing have posted better growth in assets, earnings and sales compared to those that didn’t.
This article appeared in the Hong Kong Economic Journal on Sept. 21.
Translation by Julie Zhu
[Chinese version 中文版]
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