Yuan Rule Change Set to Spur Dollar Borrowing, Offset Outflows

(Bloomberg) -- China's easing of foreign-currency conversion rules last month is fueling speculation that regulators want to revive flagging dollar bond sales and support a tumbling yuan.

Chinese companies will have more flexibility in repatriating funds borrowed overseas, including deciding on timing, the State Administration of Foreign Exchange said on its website in June. The firms have responded to rising costs for servicing foreign debt by cutting dollar bond issuance 21 percent in the first half to $39.4 billion, while increasing domestic note sales 24 percent, Bloomberg-compiled data show.

“Chinese regulators want to encourage capital inflows to counter the rising capital outflows,” said Liu Dongliang, a senior analyst at China Merchants Bank Co. in Shenzhen. “The measures may result in an increase in offshore dollar bond sales by Chinese companies, especially those which have difficulty selling bonds onshore. But the amount won't be big enough to change the whole picture.”

China's foreign-currency reserves have dropped 20 percent from a $4 trillion peak in June 2014 to stand at $3.21 trillion and the yuan lost a record 3 percent against the dollar in the second quarter. The currency is now at the weakest level since November 2010. The new policy will attract Chinese firms with the best credit quality that can get cheaper funding offshore and those with weak credit quality struggling to raise funds onshore, according to Moody's Investors Service.

“The new SAFE rule puts in place a mechanism for Chinese issuers to bring proceeds back home,” said Ivan Chung, head of Greater China credit research at the rating company.

Local government funding vehicles, which have previously faced hurdles raising funds outside China and are now struggling to sell debt at home, "are the most likely to benefit from the new rules," Chung said.

These LGFVs, set up before China allowed direct bond sales by regional governments, are lining up to meet investors for potential offshore note offerings. Shenzhen Expressway Co., Chongqing Nan'An Urban Construction & Development and Huai'An Development Holding Co. are currently hosting roadshows, according to people familiar with the matter.

LGFV Offerings

Yunnan Metropolitan Construction Investment Group Ltd. sold $500 million three-year bonds this week. Tianjin Infrastructure Construction & Investment Group Co. and Xuzhou Economic Technology Development Zone International Investment Co. sold securities last month.

The National Development & Reform Commission last September removed quota approval processes for foreign currency or yuan bonds and loans with a term of more than one year. It also allowed issuers to use debt proceeds onshore or offshore.

“Given high-quality LGFVs are able to get high international ratings, they should manage to get funds in the dollar bond market at the same or even lower yields than the home market,” said Zhang Xing, Hong Kong-based head of debt capital market origination for overseas markets at China International Capital Corp.

--With assistance from Carrie Hong To contact the reporter on this story: Lianting Tu in Hong Kong at ltu4@bloomberg.net. To contact the editors responsible for this story: Andrew Monahan at amonahan@bloomberg.net, Sandy Hendry