Chinese LGFV Offshore US Dollar Bond Market: The Impact of COVID-19 Epidemic on Highly-Rated Chinese LGFV Issuers Likely Remains Moderate

Concerns over the potential negative impact of the COVID-19 epidemic on the global economy caused significant pressure and fluctuation in the capital markets worldwide in 1Q 2020 as investors were rushing for safety by disposing of risky assets. This resulted in widened credit spreads for some Chinese issuers especially non-investment-grade companies in the Chinese offshore USD bond market, although the impact on China’s Local Government Financing Vehicles (“LGFVs”) was less significant based on their secondary market price performance.

We expect that the reduced risk appetite will continue constraining the Chinese offshore USD bond market performance and the bond issuance volume at least in the near term. However, the impact would be relatively moderate for Chinese LGFVs with stronger credit profile. In addition, the challenging condition with potentially wide credit spreads, together with the current NDRC regulation on the use of offshore proceeds, may deter first-time Chinese LGFV issuers to tap the offshore USD bond market to avoid high financing cost and the short to medium tenors will likely remain the main stream.