Things are looking up in China’s domestic bond market.
About a dozen Chinese property developers have issued domestic bonds in order to acquire cheaper funding than what can be obtained in the offshore bond market, ratings agency Standard & Poor’s said in a report on Thursday.
Domestic bonds offer many advantages, such as lower funding costs and zero risk from currency exchange, as bonds are denominated in yuan rather than the U.S. dollar.
Small and mid-sized developers prefer this method of funding, especially those with lower credit ratings, high funding costs, or limited access to banks and the offshore bond market, said S&P. About 70 billion yuan worth of bonds have been issued this year
“Tapping the onshore bond market is positive overall on the developers’ credit profiles,” Standard & Poor’s credit analyst Christopher Yip told Chinese state news agency Xinhua.
With fears of rising interest rates in the US, Yip said as long as issuance costs stay low the domestic bond market will remain appealing.
Though ranked as the world’s third largest bond market, China’s bond market is still underdeveloped in issuance structure and legal framework, Standard & Poor’s said. In addition, companies rarely default on their bonds because the government and state-backed institutions typically rescue distressed issuers out of fear of risk contagion.
“Many investors continue to assume a high level of implicit support from the government, as shown in the narrower range of credit rating and pricing differentiation,” Yip told Xinhua.