The State of Administration of Foreign Exchange (Safe) gave Chinese companies a piece of good news earlier this month, loosening its strict capital rules to allow companies to borrow in dollars or other foreign currencies in the country, and pass that to their offshore subsidiaries through inter-company loans. This is a break from the past, where most offshore subsidiaries were forced to fund themselves by turning to foreign lenders.
The exact terms of the new policy are at this point vague. Chinese corporations will still need to get approval from Safe to send money offshore, and there is no telling how big the quotas they get will be. The agency has also said nothing about restrictions to their rules — perhaps minimum credit requirements or preferred sectors — but that does not mean all companies will be treated equally. When it comes to the capital account, China prefers to move slowly, and keep the flexibility to change its rules quickly.
But overall, the brief announcement issued by Safe on June 15 is clearly good news for Chinese companies, giving them more flexibility over how they fund. Some bankers, however, fear that it is not such good news for them.
Foreign lenders have relied on volumes from Chinese borrowers to keep their lending books even half-way decent over the last few months, and look likely to continue to do so for the next few. This has put some bankers on edge about the latest policy, fearing that it will hit their volumes. That is an understandable concern, but they should not fret. In the short term, the damage will be minimal — and in the long term, the move could prove positive for foreign lenders.
Long-term gain
Chinese regulators have a reputation for keeping a firm grip on the lending of the country’s state-owned banks — at least, when they feel it matters. Sometimes banks are even told exactly how much of a deal they are expected to take, according to a banker at a mainland lender.
It is hard to tell how often this happens, but is clear that when the government issues a new policy about lending, state-owned banks are likely to be pretty clear about its intention. And this time, the intention seems to be to help those who can’t help themselves.
There were $378bn of foreign currency deposits in China in May, compared to $566bn of foreign loans in the country, according to Moody’s. That gives a loan-to-deposit ratio of 149.7%, well above the 75% imposed on Chinese banks for overall lending. The government is likely to frown upon much of the country’s already-squeezed foreign currency liquidity going to state-owned companies, said analysts, since these borrowers can already attract funding offshore.
Chinese property companies are also unlikely to benefit much from the new rule, since they are struggling to get even renminbi-denominated loans in China. The easing of domestic lending rules is, then, most likely to benefit privately-owned companies operating outside the property sector, a group of issuers that often struggles to access the loan and bond markets overseas.
These companies may not be ready to turn to foreign banks for funding now, but they will look more attractive once the rule comes into effect at the start of July. They will expand their foreign funding at home, expand their businesses overseas — and speed up their introduction to international lenders.
Foreign banks should also take heart that, right now, they can offer better pricing. This means that once the new rule unleashes a new group of borrowers offshore, the smart ones will choose to turn to foreign lenders for cash, whether refinancing their old deals or taking out new ones.
It is understandable that some lenders should be worried about losing business from Chinese corporations thanks to Safe’s latest announcement, and there may be some familiar faces that decide to turn to their onshore relationship banks instead of funding outside of the country. But even more new faces will be added to the market, as their foreign currency funding puts them firmly on the radar of overseas banks.