The U.K.’s divorce from the EU will likely exacerbate the trend
Wall Street Journal - Nina Trentman - 03 April 2017
Chinese corporate bonds issued in European currencies lag far behind their dollar counterparts, a trend expected to continue as the U.K.’s exit from the European Union threatens to shake financial markets on the continent.
During the first quarter, Chinese companies issued five internationally marketed euro-bonds worth $3.8 billion, giving the common European currency a 7%-market share, according to Dealogic.
Around 90% of all Chinese overseas bonds during the first quarter were issued in U.S. dollars, the data show.
Issuance in U.K. pounds was even more limited, with a single bond launch worth $322 million. The pound currently only represents 1% of Chinese internationally marketed bonds. There were no issuances in Swiss francs or other European currencies during the first quarter.
Raising capital overseas is one of the solutions that Chinese companies have come up with amid increased regulatory scrutiny on capital transfers out of China. The Chinese government at the end of 2016 introduced tighter rules on capital outflows, targeting both transactions by subsidiaries of foreign companies as well as those by Chinese firms attempting to acquire overseas M&A targets.
There are more advantages to greenback debt. “Issuing a U.S. dollar-denominated bond lets the issuer tap a larger investor base, making these bonds more attractive than euro-denominated bonds,” said Chunshek Chan, head of M&A-research at Dealogic.
With the exception of state-owned enterprises, many Chinese issuers, particularly smaller firms, struggle because they’re virtually unknown in Europe, Mr. Chan said.
Chinese businesses may be more comfortable dealing in dollars because it is the currency of choice when settling payments with overseas customers, said Horst Löchel, a professor at Frankfurt School of Finance & Management.
“Capital raised overseas in U.S. dollars is much more useful than capital raised in euros or U.K. pounds,” he said.
Britain’s exit from the EU is likely to lead to fragmentation among capital markets across the continent, making it less attractive for Chinese companies to raise debt in Europe, Mr. Löchel added.
The City of London is likely to lose its so-called passporting rights, regulations that now allow for seamless access to Continental European customers. Capital markets in Europe could lose some business to New York, he said.
The lack of Chinese bonds denominated in European currencies mirrors an 87% decline in Chinese acquisitions during the first quarter, according to Dealogic. China M&A in Europe hit a record $54 billion in 2016.
“Chinese corporations these days invest more in markets using the U.S. dollar -- such as North America or the One Belt, One Road-countries in Central Asia -- than those using the euro or the pound,” said Oliver Rui, a professor of finance at China Europe International Business School in Shanghai. One Belt, One Road is a trade and development initiative among dozens of Asian countries, led by China.