(The following statement was released by the rating agency)
Fitch Ratings-Shanghai-May 07: Improved onshore market liquidity, fuelled by an increase in corporate bonds and bank loans, should alleviate refinancing pressure on Chinese corporates to varying degrees, says Fitch Ratings. However, offshore bond issuance remains muted.
China’s corporate credit growth hit almost 10% yoy as of end-1Q20 - the highest level since 2017 - amid regulators’ efforts to support domestic corporates’ liquidity and boost GDP growth in light of the coronavirus pandemic. Corporates’ onshore bond issuance reached CNY3.1 trillion in the first quarter, up by 33% yoy, and monthly issuance in March and April hit record highs.
State-owned enterprises (SOE) contributed the vast majority of net onshore corporate bond issuance in 1Q20, with a 91% share by deal size, up from 89% a year earlier. Local government financing vehicles (LGFV) represented 38% of SOEs’ net issuance.
Privately owned enterprises (POE) have benefitted less from the broad liquidity easing, even though their balance of outstanding bonds has increased for three straight months, ending the contraction throughout 2H19. Nonetheless, nearly 80% of incremental issuance by POEs was from large, leading companies rated ‘AAA’ by domestic rating agencies. Property companies contributed 27% of POEs’ net issuance in 1Q20.
Meanwhile, corporate’s onshore bond funding costs fell moderately due to lower risk-free rates, in contrast to yield hikes on Chinese issuers’ US-dollar bonds. For example, the median yield of two-year medium-term notes with a domestic rating at or above ‘AA’ declined by 40bp-50bp during the first quarter. Nonetheless credit spreads expanded by 10bp-20bp across ‘AAA’-‘AA’ domestic ratings in March, as investors demanded higher credit-risk premiums in the wake of the coronavirus pandemic.
Net increase in corporates’ bank loans also recorded a strong growth of 48% yoy, or CNY5.3 trillion, for 1Q20, driven by a surge in short-term loans following the virus outbreak. In addition, the benchmark loan prime rate slipped further to 3.85% on the one-year tenor in April, down from 4.05% in February and 4.15% in December 2019. The Chinese central bank is likely to keep ample liquidity this year to support GDP growth, protect employment and contain systemic risk, as the pandemic has crimped domestic consumption and exports.
Corporates may shift toward onshore funding to avail lower funding costs or to refinance offshore debt maturities, but refinancing challenges remain for low-rated POEs facing large near-term offshore maturities.
Associate Director, Corporates
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