The PBoC has been busy with credit stimulus measures this year, in a bid to tackle slowing growth in China’s economy. A cumulative 65bp of rate cuts have been announced since November 2014, and February saw a 50bp reduction in the headline reserve requirement.
But the impact of these measures are still to be felt by many borrowers, especially those in the mid-cap segment, which struggle to get support from big Chinese lenders stung by non performing loans last year. In addition, non-centrally owned state owned enterprises often get short shrift from big banks.
This is where foreign lenders are looking to step in, and there is no shortage of interest in growing their businesses in China. Many are facing intense competition offshore, a result of the combination of abundant liquidity and dealflow that is down to a trickle. Against this backdrop, the prospect of a bigger onshore renminbi franchise is a tempting one.
The makeup of syndicates in deals for Chinese borrowers reflects this. Jiangxi Provincial Expressway recently sealed a Rmb600m ($97m) onshore loan from foreign banks, with DBS as the sole mandated lead arranger, bookrunner and facility agent. It initially launched the borrowing at Rmb400m ($64.45m) in January, but this was increased after a 50% oversubscription.
Banca Monte Dei Paschi Di Siena, Bank of Tokyo Mitsubishi UFJ, Chang Hwa Commercial Bank and Dah Sing Bank joined DBS to supply the funds. The financing marked the first time Jiangxi had tapped foreign banks for a borrowing, DBS said in a press release.
Jiangxi, meanwhile, highlighted one benefit to borrowers of such a strategy, which is to ensure more options for offshore financing in the future.
“The success of obtaining a syndicated loan via foreign banks is critical to the access of offshore financing, enabling the group to leverage debt financing to internationalise its operations,” said Que Yong, chief financial officer of Jiangxi.
The interest by Japanese and Hong Kong banks in Chinese deals indicates a wider ambition by banks to rev up their business in the mainland.
“They need renminbi loan assets on their balance sheet,” said a Hong Kong based banker who was previously based in Shanghai. “Foreign banks have been aggressive in the last couple of years and though they have somewhat slowed down, there are new waves of interest coming in, like from the Taiwanese.”
The league table rankings for bookrunners of onshore renminbi syndicated loans from January 1 2014 until now shows that six of the top 10 spots are taken up by international lenders. Standard Chartered comes in fifth, with $469m worth of deals and a 1% market share. DBS, Mizuho, Crédit Agricole, Sumitomo Mitsui Banking Corp and HSBC round off the top 10, with a combined 3.4% market share, according to Dealogic.
Growth potential is restricted by onshore rules stipulating that banks operating there cannot lend in excess of their equity. But they can still expand activity through deposit growth, and many international firms are looking to do just that.
Banks booking assets onshore also enjoy a more protected, regulated environment, although this is now being liberalised. And this liberalisation could derail banks’ attempts to grow in the region, bankers caution.
“If it is liberalised [completely], even big Chinese banks will face pressure,” said a banker who looks at North Asian deals and works for an international lender active in the mainland. “I think they already are [facing pressure]. The heat will definitely be on for foreign banks. Even the big Chinese are struggling to get deposits.”
Smaller loans
“Local Chinese banks have a very big balance sheet,” said the second banker. “They can easily lend Rmb2bn-Rmb3bn ($327m-$490m), and they don’t need to share. So foreign banks mainly get the smaller deals.”
In the case of Jianxi's deal, the borrower was keen to diversify its relationships, said a banker close to that trade. The move does not necessarily mean they will look for funds offshore, he said, but could be preparation for when they might have smaller funding requirements than would interest their Chinese lenders.
Foreign banks are also natural lenders when it comes to supporting multinational corporations making inroads into China. “We can bring clients from our home country to China and lend in the first one or two transactions,” said the second banker. “For any kind of fancy [structured] products, they will still need foreign banks.”
However, he conceded that for straightforward lending, even these MNCs may drop foreign banks once they have established relationships with big mainland lenders.