ANALYSIS-Cash-rich China banks spread wings overseas
Reuters, 03.18.04, 4:40 AM ET
By Charlie Zhu
SINGAPORE, March 18 (Reuters) - Armed with a dollar cash mountain built up from years of trade surpluses, state-owned Chinese banks are rapidly expanding wholesale lending overseas and using their muscle to cut prices and gain market share.
Beijing hopes the move will help clean up the bank's balance sheets, sullied by years of serving as a virtual cashier for the ailing state sector and help develop international experience.
Their presence -- which already accounts for one fifth of the international offshore syndicated loan market in Asia, excluding mainland China -- is forcing down loan pricing, experts said.
"What Chinese banks are doing was what the Japanese banks did in the '80s, which is just being everybody's cheap liquidity," said Paul Sheehan, managing director and regional head of banking at ING Financial Markets in Hong Kong.
Chinese banks lent a total of $14.4 billion last year in overseas markets, mostly in Hong Kong, up 50 percent from $9.6 billion in 2002 and from $7.6 billion in 2001, according to Basis Point, a Reuters company. Their market share in Asia rose to 21 percent from 13 percent in 2002 and nine percent in 2001.
Some American banks and European banks, such as Bank of America, have moved out or cut their corporate lending business in Hong Kong as pricing has been tightened by Chinese banks, experts said.
Major Western players now having to compete against the Chinese banks overseas include HSBC Holdings Plc, Standard Chartered and Citigroup.
Chinese banks are also moving into the more complicated project finance market, now dominated by west European and Japanese banks, which started aggressive overseas lending about 20 years ago when Japan's economy was booming.
Bank of China, the country's largest foreign exchange bank, may lend over $1 billion for BP Plc's Tangguh liquefied natural gas (LNG) project in Indonesia that will supply gas to China, an Indonesian official said.
China's major lenders are the 'Big Four' -- Bank of China, China Construction Bank, Industrial and Commercial Bank of China and Agricultural Bank of China, which have units from Hong Kong to New York and London. Bank of China's BOC Hong Kong (Holdings) Ltd is the territory's second largest lender.
"I just see it as a natural extension. You can earn decent money and at the same time spread your risks and get involved with some of the foreign banks," said Hong Kong banker Michael Yahng, who worked at Bank of Boston for 21 years until 1997 and is now the managing director of lending agency Trinergy Finance.
PROFITS NOT A FOCUS
China's banks have plenty of deposit firepower to back their lending and owners who are not focused on profits, unlike their rivals. The banks have around 11 trillion yuan ($1.3 trillion) parked in personal savings accounts and $146 billion in foreign exchange deposits.
In many cases, a syndicated loan deal in Europe would be priced at least 25 percent higher than similar deals in Hong Kong, said a Hong Kong-based senior European banker.
Conglomerate CITIC Pacific is due to sign a deal to borrow HK$5.2 billion ($666 million) from a group of banks next Monday, a market source told Reuters on Thursday. About 27 percent of that will come from Chinese lenders.
The five-year tranche would be priced at 40 basis points over HIBOR (Hong Kong Interbank Offered Rate), while the six-year tranche would be set at 43 basis points over HIBOR.
"They (Chinese banks) are very, very important providers of liquidity here. Without their presence the market in Hong Kong would definitely look very different," the European banker said.
"In Hong Kong, if you move those banks out of the market there is no way the deals could be done at the size being done and at the tight pricing being done at the moment."
And Chinese lenders are using the same strategy in the project finance loan market.
"Chinese banks financing projects abroad will present competitive pricing pressures on international banks," said Raj Pande, partner at lawyer firm White & Case LLP, which has advised many major project financings across the world.
Their capacity has been boosted by Beijing's recent injection of $45 billion into the Construction Bank and Bank of China, which are preparing for overseas listings.
RISK DIVERSIFICATION
Between 2000 and 2003, Chinese banks lent $1 billion to overseas projects, most of which were based in Hong Kong, including the Disneyland project, research firm Dealogic said.
Project finance loans, in many cases, are deemed riskier than corporate loans as its payment comes from the cash flow of the project itself. It also requires expertise in risk analysis and loan structuring, which the Chinese banks lack.
"What they don't have and what they are not going to have for another decade is the experience," said ING's Sheehan.
Many foreign banks, including Japanese lenders, suffered heavy project finance losses during the 1997/98 Asian crisis. But backed by the economic recovery, project finance volume in Asia rose 18 percent to $31.4 billion in 2003, led by power, infrastructure and petrochemical projects.
Chinese banks are mainly targeting overseas projects linked to the domestic market.
"I would not see them competing for business which isn't connected into China in some shape or form," said John Corrin, head of Asia-Pacific loan syndication at Credit Lyonnais.
"They have not really got as far as the India risk," he said, referring to projects linked to other neighbouring markets. "But it is just a matter of time because they are looking for better opportunities and risk diversification throughout the region."
Copyright 2004, Reuters News Service
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