China slowdown to weaken APAC cross-border sentiment in 2019

Chinese corporates' onshore funding costs are forecasted to fall further.

Slowing economic growth in China, lower capex and mergers and acquisitions (M&A) and a weaker yuan will continue to weigh on cross-border issuance by Chinese corporates in 2019, contributing to a moderate fall in overall APAC cross-border issuance, according to a report by Fitch Ratings.

The relaxing of some regulatory restrictions in India and capex plans of state-owned enterprises in Indonesia are likely to increase issuance from these countries, mitigating the potential drop in Chinese supply. However, unexpected outcomes of forthcoming elections in both countries could inhibit investor appetite in H2 2019.

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Fitch Ratings said that the same factors that led to the decline in APAC issuance in 2018 to $207b, from $228b in 2017, will remain in place in 2019. These include slowing global economic growth and lower capex mainly in China, US interest rates remaining well above that of 2017, and a more risk-aversed stance by investors.

The pause in US Fed interest-rate hikes should support issuance, with activity picking up since January 2019, particularly by high-yield credits in Asian emerging markets.

“China, which represents about half of total APAC cross-border issuance, was the main contributor to 2018's fall, with issuance out of the country declining by $14b. We expect cross-border issuance by Chinese corporates to fall moderately in 2019, but to still be around the $100b level,” the report’s authors highlighted.

Chinese corporates' onshore funding costs, which have fallen by around 120bp for investment-grade corporates over the past 12 months, are forecasted to fall further in light of consensus expectations for further cumulative cuts to the country's reserve ratio requirement during 2019. This may lower demand for cross-border issuance, notwithstanding any one-off funding requirements, such as for M&A.

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However, Chinese cross-border issuance should still be supported by refinancing related to offshore maturities of $67b in 2019 and a further $87b in 2020.

“In particular, we expect the homebuilding sector to continue issuing and refinancing via offshore bonds in light of policy curbs on domestic issuance,” Fitch Ratings noted. The sector accounts for 33% of the country's outstanding cross-border bonds as well as 44% of 2019 offshore maturities and 40% of 2020 offshore maturities. Fitch estimates that Chinese corporates will have registered $30.1b in cross-border issuance in Q1 2019, which is on a par with quarterly issuance amounts over Q2 2018 to Q4 2018, albeit below the $39b issued in Q1 2018.