China’s National Development and Reform Commission (NDRC) is expected to expand quotas for Chinese enterprises to sell debt in the offshore renminbi market as soon as the second quarter of the year.
Several sources at regional, Chinese and global banks tell Asiamoney PLUS that the NDRC may look to expand quotas by as much as two-fold – from Rmb50 billion (US$8 billion) to nearly Rmb100 billion - to allow more state-owned enterprises (SOEs) to sell debt offshore.
In addition, regulators may approve issuers on a case-by-case basis at the time they apply rather than handing out all the quotas at the beginning of the year. This will have to be agreed by the NDRC – whose role is to monitor debt issuance by SOEs in the Mainland - along with the People’s Bank of China (PBoC) and the State Council.
The idea is to give a wider range of Chinese companies greater scope to issue dim sum bonds as and when they look to sell, which in turn will help develop the offshore renminbi, or CNH, market and help internationalise the renminbi currency.
“Last year the allocated quotas equalled about Rmb50 billion for financial and non-financial issuers combined, with banks getting half that quota and non-financial institutions like SOEs getting the other half. But this year we’re confident the quotas will be much larger than that,” said one CNH-focused banker at a Chinese brokerage. “No one knows how much the quotas will be expanded by, but I expect the full quota to be more than Rmb100 billion.”
Calls and emails to the NDRC went unanswered by press time.
One China-focused analyst at a global credit ratings agency adds that state-backed companies, which do not have dim sum issuance quotas, have been approaching the agency in recent months to inquire about obtaining ratings. This acts as a telltale that SOEs are expecting greater access to the market.
“I’ve heard from quite a number of potential issuers that do not have any quota for issuing dim sum that these quotas will expand this year. And in the past two months in particular there have been lots of enquiries by Mainland issuers who want to know about the ratings process and how much time it will take to get a rating,” said the rating agency source. “Everyone has knowledge that the quotas will be expanded, or else they wouldn’t be asking about it.”
He estimates that the quota will be upped by Rmb40 billion, nearly double the current size. “The NDRC wants to expand the quota but on the other hand they want to make a big enough but not too big so that there is still more demand than supply. This way people will compete for quotas and there will be a better sentiment in the market.”
Market sources say there is no definitive timetable for the NDRC to issue the expanded quotas. Yet they guess it will be during or after the second quarter of the year, after China’s leadership transition and after the current issuance quota – which approximately 80% used – is exhausted.
In the last round of SOE approvals, Baosteel, China Guangdong Nuclear Power, China Minmetals Group, Datang Group and Huaneng Power International each received quotas. All but China Minmetals have used theirs, with the most recent bond sold by Huaneng Power on January 30.
Additionally, a more diverse group of issuers are expected to tap the market. So far, each of the SOEs invited to issue in CNH have been owned by the central government. But in the upcoming round, companies owned by local municipalities are expected to issue debt.
“More provincial government-owned enterprises will be involved in dim sum issuance. It would be premature to guess which companies they would be, but provincial public utilities and infrastructure companies could be some of the major drivers of growth the next three years. Regulators will want these companies to gain overseas exposure,” said the credit ratings source. “The next round of quotas will be more diversified because ultimately it’s the government’s intention to introduce more diversity into the market for trading and investment.”
And Chinese enterprises have been keen to participate, as well. High demand for CNH-denominated bonds as well as the continued expectation that the renminbi will appreciate against the dollar have driven yields down for Chinese dim sum issuers. This has helped to create an up-to 100 basis point (bp) spread between yields in the offshore and onshore markets.
“In terms of spreads, companies can still find arbitrage opportunities of 25bp to 100bp, with greater savings for highly rated SOEs,” explained one senior China-focused debt capital market banker. “Currently, the NDRC has approved issuance by power and utility companies. With the next time around, its quotas will be market-driven by companies that see the opportunity to issue offshore.”