Last week’s $1.6bn subordinated debt deal for Bank of China Hong Kong raises the tantalising prospect that China’s biggest lenders are eyeing the international markets as a way of meeting their ever-growing funding requirements.
Could this be the start of something big? Certainly if the rest of the big four follow suit then it is easy to imagine that China will leapfrog immediately to the top of the pack as the biggest market for international deals from Asia outside of Japan.
China is increasingly using Hong Kong as its foreign exchange centre, and as it moves to make the renminbi more international it makes sense to channel more foreign currency financing through the city. International investors will love the chance to buy anything remotely linked to the Chinese sovereign, and a state-owned bank would fit the bill — the last quasi-sovereign issue from China came in September 2005.
The country’s banks need money to keep pace with loan growth, and regulators are aware of the problems of issuing subordinated debt in the bank-dominated domestic markets, where risk remains within the banking system. Overseas funding can also come at very competitive levels, if BOC’s deal — priced at 200bp over Treasuries — is anything to go by.
But big dollar-denominated deals don’t seem to make sense in a country with the world’s biggest pile of foreign exchange reserves. China’s banks have limited dollar funding needs of their own, and any liberalisation of the strict currency controls is unlikely to happen overnight. Moreover, if the proceeds from these deals have to be kept in Hong Kong, it’s hard to see any of the other big four would have the need.
This week’s deal poses some interesting possibilities, but it’s much too early to get excited.
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