LIQUIDITY on China’s onshore bond market continues to remain strong following the People’s Bank of China’s decision to cut the required reserve ratio (RRR) for the seventh time since 2018. The easing measures have been beneficial to the growth of China’s onshore bond market with Moody’s Investors Service (Moody’s) data revealing that during the first three quarters of 2019 onshore issuers raised 7.1 billion yuan. This represents a 31% year-on-year increase from the 5.4 billion yuan raised around the same period last year.
Yet despite the additional liquidity in the market some issuers are having difficulty in their fundraising exercises. “Onshore bond market conditions remain difficult for weak issuers especially privately-owned enterprises (POEs) to refinance their bonds in the next 12 months. This is because investors remain risk averse toward weak issuers, which is reflected in the continuing wide credit spread between issuers of high and low onshore ratings since the second half of 2018,” states a Moody’s research note.
Investor sentiment is further dampened by the fact that defaults have been on the rise in onshore China as part of the country’s market development. Information from financial data provider Wind Information shows that 18 new corporate issuers defaulted on their onshore public bonds during the first nine months of 2019 where most of them were POEs. Total amount defaulted so far in 2019 is 60 billion yuan, which is already more than the 56 billion yuan defaulted during the entirety of 2018.
The second largest bond market in the world, China’s bond market is primarily made up of issues from the central government, policy banks and regional/local governments representing 55% of the market according to China’s Central Depositary & Clearing (CCDC). Chinese policymakers going forward have high ambitions for the onshore market such as increasing the diversity of issuers onshore to include international issuers.
For instance, in June 2019 Malaysia-based Maybank issued its second panda bond which experienced high demand from onshore investors. Other goals for China’s bond market include increasing the proportion of onshore foreign holdings. Since the launch of the Bond Connect programme in 2017 foreign holdings increased from 1% to 2% based on CCDC data.