China leasing bonds: strength in numbers

China's leasing companies have made the most of their easier access to the dollar bond market. Perhaps surprisingly, they are stronger for it.

Chinese leasing companies have made the most of easier access to the dollar bond market. Perhaps surprisingly, they are stronger for it, which is reassuring given the sector's astounding growth.

Bankers and investors that keep a close eye on China quickly get used to reeling off an array of mind-boggling numbers. Take the $30 trillion-worth of assets held by the country’s banks or the country's foreign currency reserves, which are still worth around $3.2 trillion, despite a sharp recent drop.

The economy is also more than 100 times bigger than it was 50 years ago and almost five times bigger than a decade ago.

But even those used to such breathtaking figures could be forgiven for struggling to comprehend the enormous growth of the financial leasing sector since 2007.

There were just 88 leasing companies in China that year, holding assets worth Rmb24 billion ($3.59 trillion). By the end of 2014 — the most recent year for which the government has released figures — there were 2,202, holding assets totalling Rmb3.2 trillion.

This exponential growth has extended to the bond market. Chinese financial leasing companies have raised $11.76 billion so far this year, already dwarfing the $9 billion they issued throughout 2015, according to Dealogic. Much of this fund-raising has come in the dollar bond market.

But that frothy growth now appears to have come to an end.

Rising competition in the Chinese leasing sector has not helped but the problems go deeper than a mad scramble for business, said Wang Wen, an analyst at GF Hong Kong Research.

“There is more competition now but it is not just that,” she said. “The macroeconomic situation is quite fragile and there are rising concerns about asset quality. It has become harder for leasing companies to find assets that meet their standards.”

That is especially true of the bigger leasing companies, which are showing more restraint than some of the newer entrants, a second credit analyst in Hong Kong told FinanceAsia

After years of heady growth, the bigger companies are funding it difficult to keep growing without adding too much unwanted risk. The possible implication is that the steady issuance of dollar bonds from Chinese leasing companies will slow down dramatically.

But that does not appear to be happening.

Minsheng Financial Leasing raised $450 million at the tail-end of last week, splitting its financing between a $350 million three-year bond paying 195 basis points over Treasuries and a $100 million five-year note paying a 225bp Treasury spread.

Bank of Communications Financial Leasing is next up, after picking Standard Chartered to manage a $300 million three-year deal that it wants to close next week.

One reason for the continued dollar issuance is that these companies are trying their best to expand overseas. China’s strict capital controls and cheap domestic funding rates mean few of these companies would turn to the dollar market if they did not have a real need for the currency. Minsheng Leasing, for instance, is said to be keeping the $450 million it raised to fund offshore business.

Another reason is that Chinese regulators, often not the most helpful bunch, have done their best to give the industry a shot in the arm.

Regulatory help

The State Council issued new guidelines for leasing companies last September that contained a raft of looser rules, including easier access to offshore funding, which has helped Chinese leasing companies to expand.

Perhaps unexpectedly, it has also made them stronger, said the second credit analyst. 

In the domestic market, these companies rely far too much on short-term funding of less than one year, creating an asset-liability mismatch that could be disastrous in times of volatility. In the dollar market, they tend to fund in three and five-year maturities, just as Minsheng did last week.

That is a much safer form of funding for companies that often tend to offer long-term leases.

As a result, analysts say they expect dollar bond issuance from the sector to keep up a strong pace.

The sector may not grow as fast as it has in recent years — China’s head-turning numbers cannot last forever — but bond investors can rest assured that they will have plenty more chances to boost their exposure to the sector before the party is over.

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