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The rates curve has gone crazy

Thursday, September 22, 2022
  • Writer's pictureK

So, none of this makes sense anymore.

For a long time, offshore financing - which was predominantly priced off the LIBOR or overnight rates - had always been significantly lower than the benchmark rates in China. For years, raising offshore money at a lower cost had always been the de facto fundraise strategy. Today, it is obvious that the tables had turned, quite abruptly as well. After you account for taxes, hedging costs (which is somewhat upside down now) and geopolitical risk, raising offshore money in China doesn’t seem to make much sense at all, not at least in the near term.

While the rest of the world is hiking interest rates, China is going in the opposite direction, encouraging credit activity to boost growth and revive the economy. Earlier on, a consultation paper was also released, outlining guidelines towards formalising and further regulating the approval of offshore debt, on the pretext of promoting the healthy and orderly development of overseas financing by enterprises. Putting aside its over-leveraged property market and inflation in the rest of the world, it is almost as if the policy is indirectly encouraging Chinese companies to source for capital domestically rather than look elsewhere for financing.

The combination of all of the above, coupled with no end in sight of travel opening up, seems to hint that China is closing up from the rest of the world.

With the largest manufacturing engine closed from the world and the severe shortage of oil due to the war, you can hike all the rates you want but I don’t think that is going to meaningfully bring prices down.

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