Chinese banks are heading overseas to expand their loan books and fund Belt and Road Initiative (BRI) projects, but such a bold strategy may not be employed by lenders who are unfamiliar with the assessment of credit risks in the countries along the route.
The belt and road project was spearheaded by Beijing and endorsed by President Xi Jinping in late 2013, aiming to improve trade and economic integration across Asia, Europe and Africa.
Bank of China priced three bonds in overseas markets last week as its Macau, Panama and Hungary branches sold US dollar-denominated and offshore yuan-denominated bonds to raise US$1billion-equivalent of funding. This came on the heels of significant commitments made by other Chinese lenders, such as China Development Bank and Bank of China.
“According to our data, nearly half of Chinese overseas loans are in yuan, which is huge compared to a few years ago,” said Alicia Garcia Herrero, chief Asia-Pacific economist at Natixis. She estimated that China Development Bank had loaned about US$100 billion while Bank of China had already committed to US$20 billion in loans.
Garcia Herrero said liquidity conditions in China are very tight and that even if the People’s Bank of China (PBOC) were to inject funds and make conditions accommodative, liquidity is leaving the country, which is reflected in reserves hardly increasing despite the large trade surplus.
This photo taken on May 27, 2021 shows the Kaposvar solar power plant built by China National Machinery Import and Export Corporation (CMC) in Kaposvar, Hungary. Photo: Xinhua
“Belt and road linked institutions are semi sovereign,” said Andy Xie, a Shanghai-based independent economist. “They can raise money like the World Bank and Asia Development Bank. An important goal in their fundraising is to maintain a liquid market for their papers. I suspect that this goal is driving what’s going on.”
State-owned Bank of China’s Macau branch, which raised 1 billion yuan (US$140 million) via three-year bonds, said the net proceeds will be used to finance or refinance projects located in the belt and road partner countries.
“Chinese banks are funding more belt and road projects, which, in our view, is the only way to export overcapacity from China,” said Warut Promboon, a managing partner at Bondcritic. “Bank non-performing loans are on the way up and recent fundraising at Chinese banks adds more capital cushion.”
Credit demand in China has been sluggish. The world’s second biggest economy reported that total social financing flows turned negative in April, the first time since October 2005. Earlier this month, it reported slower than expected social financing and loan growth for May, which Goldman Sachs economists said “indicated credit demand remained weak”.
Last week, PBOC chairman Pan Gongsheng said at the Lujiazui Forum in Shanghai that “it is natural that the growth rate of the total amount of finance has declined, which is consistent with the shift of China’s economy from high-speed growth to high-quality development”. He added that “many stock loans are not efficient”.
Analysts said this means banks have to venture outside for viable business, which in some ways is similar to Chinese firms seeking overseas expansions as well, as they search for credit demand which is weak domestically.
HSBC analysts said in a note this week that Chinese bank loan volumes and prices were both under pressure in the second quarter and that “banks are concerned about asset quality deterioration in individual business loans for small and medium enterprises due to their operations being disrupted during the pandemic and these loans’ collectively maturing this year”.
In June, PBOC’s Pan said that real estate and local financing platform loans accounted for a large proportion of the current outstanding loans of nearly 250 trillion yuan “which is not only no longer growing, but is declining”. He added that it was “difficult for the overall credit growth rate to remain above 10 per cent as in the past”.
And the central bank is unlikely to cut interest rates any time soon given that the currency hit seven-month-lows this week.
“The yuan has been under considerable pressure recently, and rate cuts would drag on the currency further,” said Leah Fahy, an economist with Capital Economics. “Policymakers will be keen to avoid this, given the importance the government places on currency strength.”
But for the moment, it is likely that such yuan loans will be the domain of policy banks as commercial lenders are not quite equipped to assess the risks around such exposures.
One needs to understand that the large China commercial banks’ asset quality metrics are highly visible as they are listed, and “commercial banks in China are unfamiliar in the assessment of credit risks in regions like Africa,” said Michael Chang, a banking analyst with CGS. “Policy banks are better suited for such lending in such regions and it is easier to recapitalise policy banks than the listed commercial banks.”
