A relaxation of rules governing the use of guarantees involving Chinese borrowers and external lending is just the start of a broader deregulation and should offer foreign groups more opportunities, according to a loans industry spokesman.
The new rules, issued by China's State Administration of Foreign Exchange (Safe), took effect on June 1 and allow mainland companies to use onshore assets as collateral when raising funds offshore. However, Chinese companies are still subject to PRC law which restricts the use of assets in certain industries such as telecoms from being used as collateral.
“This is the beginning of a deregulation process,” Atul Sodhi, chairman of the Asia Pacific Loan Market Association, told FinanceAsia. ”The Chinese authorities can be expected to deregulate the cross-border flow of money more over time but these are baby steps in that direction,” he added.
Sodhi, based in Hong Kong, is also the head of loan syndication and distribution for the Asia Pacific region at Credit Agricole.
China heavily regulates cross-border flows of money but it is slowly loosening the reins as mainland banks are weighed down by bad debt and liquidity onshore has tightened. It has also made it clear that the funds raised need to be keep offshore.
In the past, Chinese companies required Safe approval before they could provide an onshore guarantee or use onshore assets as collateral for offshore loans. However, now they only need to register with Safe within 15 days of signing the loan, indicate the precise use of the funds and keep the funds raised offshore. The ease at which companies can provide onshore security for offshore lending gives foreign lenders greater comfort to finance Chinese companies' borrowing.
“It will no doubt offer more opportunities for foreign lenders,” said Sodhi.
China's acquisition spree has driven lending. However, often that lending has been dominated by Chinese banks. For example, an MMG-led consortium's $6.8 billion acquisition and project facility for the Las Bambas acquisition was funded entirely by four Chinese lenders -- China Development Bank, ICBC, Bank of China and Export-Import Bank of China.
Safe's rule change signals that, increasingly, more Chinese companies could seek offshore loans amid tight liquidity onshore.
China's share of US dollar lending in the region has grown during the last half decade. According to Dealogic data, it has accounted for 18.7% of dollar lending so far this year, the biggest contributor, and last year accounted for 28.3% of US dollar lending. In contrast in 2009, it accounted for only 7% of overall dollar lending.
That activity is not expected to ebb soon, despite concerns over excessive debt taken by Chinese companies. “China will be the key driver for offshore lending in the second half,” said Sodhi.
While some small property companies have defaulted on debt and others have turned to trust financing, fanning fears of bad loans, Sodhi said these are isolated cases. “Some sectors of the Chinese economy are reportedly overleveraged” said Sodhi. “But I don’t think that problem has affected all of China Inc and I don't see too much systemic risk,” he added.
India, Indonesia pick up
China is an active market but Sodhi expects activity out of India to pick up in the second half, thanks to the feel good factor since Nerendra Modi won the elections in May.
“Sentiment has turned positive in India due to the new pro-business government,” said Sodhi. “We will see a strong second half out of India driven by outbound M&A activity,” he added. India has accounted for 15.6% of the US dollar lending so far this year, and is the third largest market in the region.
Another market that could see an uptick in lending is Indonesia, which held presidential elections two weeks ago. The country has moved into investment-grade territory and Sodhi expects more activity. “More banks are looking to lend in Indonesia and I expect more Indonesian companies to tap loan markets in the second half,” said Sodhi.
After loan volumes rose about 50% to touch $171 billion last year, the highest level seen since 2008, Sodhi said a repeated rise is unlikely. “Last year was a strong year and if we end up with volumes similar to last year it will be a good result,” he said.
Source: Dealogic
US dollar loan volumes from Asia ex-Japan have chalked up to $91 billion year-to-date.
Since the 2008 European debt crisis, many European lenders have also returned to the region having fixed their balance sheets. “There was a period when de-leveraging was the theme, but European banks are now back to normal business,” said Sodhi.
