HONG KONG (Reuters) - China is filling a lending vacuum in Asia as European banks limp home to preserve capital, and is making sure loans have spin-off benefits for Chinese manufacturers and exporters, even at the expense of the rates they offer.
Cash-strapped businesses looking to Chinese banks for loans would do well to have something to offer China in return - for big loans come with strings attached.
Lending to foreign firms in need not only boosts Chinese banks’ loan portfolios, but helps develop export markets for Chinese goods.
“If it helps China, the banks will lend,” said Vidhan Goyal, a professor of finance at the Hong Kong University of Science and Technology.
“To be able to lend, you need a lot of information about the potential borrower. This allows Chinese banks to assess whether or not it’s a worthy client that will meet China’s needs.”
A case in point: Indian billionaire Anil Ambani’s Reliance Communications this week agreed a $1.18 billion Chinese loan to repay convertible bonds due for redemption in March.
The syndicated loan - from Industrial and Commercial Bank of China, China Development Bank Corp, Export Import Bank of China and others - was approved on the understanding Reliance would buy Chinese telecoms equipment from Huawei Technologies and ZTE Corp, two banking sources with direct knowledge of the deal told Reuters.
The sources said no concrete procurement agreements had been drafted, and one said this was not a mandatory requirement for a loan. The source declined to say more, or be identified, as the issue is “highly sensitive”. The other source, however, said Chinese banks would only lend to Indian companies if this was tied to future procurement orders.
For the borrower, there is the prospect of getting a reasonably priced loan - in India, especially, the cost of borrowing has risen sharply - and China’s banks appear resigned to sacrificing some return for the greater good of China Inc.
“We have always enjoyed business with Indian borrowers. The cost of funds is higher in India, so Chinese banks have an advantage,” said a Chinese banker with direct knowledge of the Reliance loan who did not want to be named as he is not authorized to talk to the media.
Anil Ambani, the younger brother of Mukesh Ambani, Asia’s richest man, last year arranged a $3 billion Chinese loan for his mobile firm and another Reliance Group unit, sealing the deal by agreeing to spend some of the funding on Chinese telecom and power equipment.
China is by no means the first to marry commerce and diplomacy, and Beijing, through the policy-driven China Development Bank, was keen at the time to avoid a repeat of 2010 when Chinese telecoms gear was banned by India over fears of espionage, damaging earnings at both Huawei and rival ZTE.
A previous Reliance Power order for $10 billion worth of Shanghai Electric power equipment was financed by Chinese banks.
In November, Bank of China, ICBC, and China Merchants Bank were part of a 30-bank syndicate to lend $6 billion to Duke Energy, which is buying Progress Energy to become the largest U.S. electric utility.
The quid pro quo for China in that loan was that Duke would partner Chinese companies such as ENN Energy Holdings and China Huaneng Group to jointly develop projects such as “eco” cities and solar power initiatives.
“I don’t think they’re being altruistic by trying to save the region,” said a Hong Kong-based senior loans banker who works with international policy and commercial banks in syndicating loans.
”The banks have plenty of money, unlike most these days ... and are, as usual, very focused on whether their clients are buying Chinese equipment.
“They seem to be able to do large amounts if there are large amounts of Chinese equipment. They’re looking at it purely for the Chinese angle,” said the banker, who did not want to be named due to the sensitivity of the matter.
Graphic: China overseas loans - r.reuters.com/ted26s
Graphic: Loan league table - r.reuters.com/sed26s
Chinese banks started building out their U.S. and European loan presence in 2008 after the collapse of Lehman Brothers, with China Construction Bank, China Merchants Bank and ICBC setting up New York branches that year.
Bank of China leads the foreign exchange business and consistently ranks among the top-5 in loan league tables, extending more than $13 billion in lending in Asia Pacific ex-Japan each year since 2008. Its syndicated lending in Asia has risen around 42 percent since then, but lending outside Greater China, including Hong Kong and Macau, has grown by only around 8 percent, according to Thomson Reuters LPC data.
“Chinese banks have been increasing their appetite for overseas lending, and ICBC has previously said it hopes to expand its share of overseas earnings,” said Grace Wu, head of Hong Kong and China bank research at Daiwa Capital Markets.
“It’s fair to say the bank may be more willing to lend if the borrower has an existing relationship with one of its mainland (Chinese) clients.”
But the Chinese banks are reluctant lenders of last resort.
They are unlikely to get carried away as they are only too aware of the experience of Japanese and euro zone banks before them, who ultimately had to pull out of loan syndicates when markets soured at home.
Tight monetary control and some discontent among small- and medium-sized enterprises starved of credit also makes such high-profile overseas lending by China’s banks unpopular at home, loan bankers said.
Japan’s Finance Vice-Minister Takehiko Nakao said this week that his country’s banks were willing to lend, but prudence was paramount given their experience in the late-1980s, when asset prices suddenly slumped in Japan.
Credit Agricole, which had been ramping up its Asia operations until mid-last year, has a so-called ‘axe sheet’ with more than $1 billion of its loans in the region up for sale. BNP Paribas and Societe Generale are also selling loans in Asia.
Ultimately, for Chinese commercial banks, deals hang on the ties that bind.
“For the commercial banks ... (their thinking is) if there’s a Chinese company there we probably have a relationship with them, and we could look at it. If there’s not a Chinese company involved, we’re not interested,” said the senior loans banker.
International commercial banks have tended to be more flexible, looking to get involved if the business is strategic or if a company has potential or is a firm the bank would like to develop a relationship with.
“Before the recent crisis, French banks would look at a deal with no French flavor to it just because they strategically wanted to do this type of deal in that country, and they saw the client as a good client they would like to do more with,” the loans banker said.
“Chinese banks tend to say: who is the Chinese client?”
Additional reporting by Kane Wu in Hong Kong; Editing by Ian Geoghegan