A record Rmb4.64 trillion ($674.6 billion) of renminbi-denominated bonds will mature this year, according to Dealogic data. That is around 18% more than 2016.
In theory, the heavy maturities should offer a boon to domestic debt bankers, potentially giving them more than 1,500 old deals to refinance alongside the new issues they will be able to bring to the market.
But theory and practice all too often differ; two major hurdles stand in the way of a boom year for China's domestic debt underwriters.
For one thing, the market has become increasingly competitive over the last few years. The National Association of Financial Market Institutional Investors (Nafmii), the main bond market regulator in the country, allowed more underwriters to join the market in 2015, according to local bankers. The result has been a sharp rise in the number of banks and securities houses competing for business.
This is apparent in the fees on offer, bankers say. Nafmii suggests fees of 30bp per year for medium-term notes and 40bp per year for commercial paper. But in the highly-competitive world of China’s bond market, fees have dropped well below this level.
MTN fees can go under 10bp for the top issuers and to around 15bp for other issuers, said a local DCM head. Managing commercial paper issuance earns banks somewhere between 10bp and 20bp from highly-rated issuers, he added.
This is a problem for DCM heads with an eye on the bottom-line. But the greater issue facing the bond market is the same problem that looms over every part of China’s financial system — the depreciation of the renminbi, and the government’s dogged attempt to do anything it can to stop it.
Chinese regulators have already moved to limit onshore fund-raising by property companies in an attempt to stem a house price bubble. They have tightened foreign exchange rules, and clamped down on M&A activity. They are now encouraging bond issuers in a range of sectors to raise money overseas, relying on a strengthening currency as these companies transfer the proceeds of their bonds back into renminbi.
From a Chinese issuer’s point of view, now is a terrible time to raise foreign currency you don’t need. Those funding officials that choose not to hedge will be taking significant currency risk; those that do hedge will see their funding costs rise. But Chinese government officials have made clear in private meetings that this is what they want, according to local bankers.
The result is going to be less business to go around in the domestic market, potentially putting even more pressure on local fees. That will not deter China’s biggest banks and securities houses, many of which have now developed strong offshore businesses.
But for smaller players, including the local commercial banks that have tried to muscle in on the debt underwriting business, China’s bond market may be about to become a tougher place to do business.