China’s Rating Cut Exposes Companies Hooked on Dollar Borrowing

China’s first credit rating downgrade by Moody’s Investors Service since 1989 couldn’t have come at a worse time for the nation’s companies, which have never been more reliant on the overseas bond market for funding.

While Chinese companies’ foreign-currency debt is only a fraction of the $9 trillion local bond market, China Inc. is on pace for record dollar bond sales this year after the authorities’ crackdown on financial leverage drove up borrowing costs at home. Overseas borrowing has also been part of the government’s strategy to encourage capital inflows in a bid to ease the depreciation pressure on the yuan.

Airlines and shipping companies, which finance the costs of new aircraft and vessels with debt, are particularly vulnerable to higher borrowing costs, according to Corrine Png, chief executive officer of Crucial Perspective in Singapore. Khoon Goh, head of Asia research for Australia & New Zealand Banking Group, sees state-owned enterprises and property developers feeling the biggest impact.

Companies including State Grid Corp. and China Petroleum & Chemical Corp raised $23 billion in bond sales in April, an increase of 141 percent from a year earlier, according to data compiled by Bloomberg. With additional $8.9 billion issuance so far in May, the sales this year totaled $69 billion, representing 71 percent of the record $98 billion in 2016.

Moody’s lowered China’s rating to A1 from Aa3 on Wednesday, citing a…

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