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After feeling the pinch from the real estate debt crisis, China is overhauling its debt issuance guidelines and is expected to enforce a registration and approval process for corporates looking to issue offshore debt with tenures longer than 1 year. China offshore bond defaults hit a record in the month of July, and nearly 85% of all Chinese bond defaults in 2022 were overseas.
A Bloomberg analysis found that Chinese firms missed out on payments amounting to $37.3 bn of offshore bonds in 2022, with property developers making up a huge chunk of the figure. Rising interest rates in the US and around the globe have made borrowing expensive. Additionally, China’s attempt to shift away from a debt-fuelled expansion may have provoked the plan to seek government approvals.
Approvals of China offshore bond issuance
A strengthening dollar is detrimental to offshore payments, whereas the US treasury rates and widening credit spread carries a higher risk for Chinese debt. Beijing is planning to introduce a structure where the National Development and Reform Commission (NDRC) will issue approvals to corporates for issuing offshore debt.
The highly stressed financial sector, along with other companies, will need to register, report and receive approval from the NDRC for issuing any debt overseas, as per a post on the NDRC website on August 26. The draft is currently open for comments and the opinion consultation will close on September 26.
However, Beijing did not clarify the parameters for the approval of offshore debt issuance. NDRC has previously said it will actively work with companies to “optimize the structure of their foreign debt interest rates and maturity.”
Hong Kong-based law firm King & Wood Mallesons in a note said that the new policy effectively transitions the NDRC’s role in foreign debt supervision from ‘recording and registration’ to ‘review and registration’. “The purpose is to further improve the management of medium and long-term foreign debts of enterprises,” writes Zhou Hao, Co-CEO of King & Wood Mallesons.
Previously, Chinese companies were required to only register their offshore bond issuance plans with the regulator. Rising corporate debt, especially in the real estate sector, has shaken Beijing. A 2019 report by the OECD found that nearly three-quarters of China’s offshore corporate bonds are issued by state-owned companies.
Meanwhile, Chinese developers are facing another $31.7 bn of maturing dollar notes this year, which could further pressure the economy.
