Trade agreement adds to loan market woes

The US and China’s signing of the phase one agreement on trade this week will finally put almost two years of battling and tit-for-tat tariff retaliation behind the countries. However, while the truce may pave the way for more market stability and a boost in investor sentiment, it spells trouble for the Chinese offshore loan market.

  • By Pan Yue
  • 14 Jan 2020
Email a colleague
Request a PDF

Under some of the terms, the trade pact will halt further tariff escalation in the near term, while China is set to increase its purchase of US goods, including agricultural products.

The agreement is certainly good news as the back and forth between the two governments had started to take a toll on growth in China, while also adding uncertainty to the market. But the ceasefire is likely to be detrimental to a key part of many banks’ businesses — their syndicated loans platform.

The Asian loans market has had quite a slow start to 2020, with few deals opened in syndication. However, the dollar bond market has had a roaring start to the year, with borrowers, including large numbers from China, flooding the market.

In the near term, the trade agreement will give a further fillip to the already buoyant bond market, as it reacts faster to market news than its slower moving loans peer.

This will attract even more companies to tap the bond market over loans for fundraising, meaning fewer opportunities for syndication bankers who are already suffering from a drop in activity. Last year, the deal count of non renminbi-denominated loans from Chinese borrowers stood at 178, down from 204 the year before, even though the deal volume increased marginally to $103.5bn from $102.6bn, shows Dealogic data.

Many Hong Kong-based loans banker told GlobalCapital Asia they expect similar deal volumes in 2020 too. Some are relying on the refinancing needs of Chinese companies to meet this year’s budget, as corporations are still reluctant to borrow new money loans.

But the lack of transactions does not mean that lenders will be willing to bank all the borrowers that do hit the market. Last year, loan defaults at a couple of Chinese companies — including Youyuan International Holdings’ HK$2.6bn ($332m) of debt, and Shanghai Sinooil Energy Holding Hong Kong’s $400m borrowing — have spooked bankers. So much so that, conservative lenders may give a pass to a refinancing deal if the company’s financials are not strong enough.

Issuers are taking notice of that slowing appetite. Some Chinese companies have started to plan their refinancing loans nine months or even a year ahead of maturity, over fears that they may not be able to put together a new deal in a short time.

A reticent bank lending market also means that borrowers could very well turn even more to the bond market to fulfil their refinancing needs, say bankers.

The loan syndications market for China has other ailments too, beyond just a declining deal flow due to US-China tensions. For instance, the absence of Taiwanese liquidity for Chinese deals is likely to continue into 2020. Taiwan’s banks had already taken a step back from lending to mainland companies, but this may be even more prominent this year after Tsai Ing-wen was re-elected as Taiwan’s president over the weekend. Tsai’s Democratic Progressive Party is in support of Taiwan’s independence from mainland China.

Additionally, Chinese borrowers hoping to push through deals with support from the local banks may also struggle. Mainland lenders are making a bigger push than before to diversify their lending portfolios, and are aggressively pitching for non-Chinese deals, particularly from Australia, say senior bankers.

The US-China phase one agreement is itself no panacea. Bankers believe that the thaw in tensions is unlikely to bring an immediate boost to the Chinese economy, or push the country’s borrowers to seek out new money loans. That will still take time to gain traction.

Overall, the trade agreement is only likely to provide a further lift to an already active bond market in Asia. Loans bankers focusing on the China market should hunker down for a challenging year ahead.

  • By Pan Yue
  • 14 Jan 2020

Panda Bonds Top Arrangers

Rank Arranger Share % by Volume
1 Bank of China (BOC) 18.86
2 Industrial and Commercial Bank of China (ICBC) 14.39
3 China Merchants Bank Co 14.21
4 China Merchants Securities Co 8.85
5 Agricultural Bank of China (ABC) 5.90

Bookrunners of Asia-Pac (ex-Japan) ECM

Rank Lead Manager Amount $bn No of issues Share %
  • Last updated
  • Today
1 China International Capital Corp Ltd 4.57 23 12.70%
2 China Securities Co Ltd 3.53 7 9.80%
3 Morgan Stanley 3.39 11 9.41%
4 CITIC Securities 3.29 11 9.14%
5 Goldman Sachs 1.70 13 4.74%

Bookrunners of Asia Pacific (ex-Japan) G3 DCM

Rank Lead Manager Amount $bn No of issues Share %
  • Last updated
  • Today
1 Citi 7.04 40 7.50%
2 HSBC 6.16 53 6.56%
3 UBS 4.68 31 4.98%
4 JPMorgan 4.49 30 4.78%
5 BofA Securities 4.36 17 4.64%

Asian polls & awards

  • GlobalCapital China 2019 awards winners: Part III

    In the final part of GlobalCapital China’s awards announcement, we discuss the key innovation of 2019, and reveal the individual that has made the greatest contribution to reforming and internationalising the Chinese onshore market.

  • GlobalCapital China 2019 awards winners: Part II

    In the second part of GlobalCapital China’s awards announcement, we reveal the winning banks across Panda bonds, G3 bonds and ABS, as well as the best bank for securities services and the most impressive law firm.

  • GlobalCapital Asia capital markets awards 2019: Investment banks

    In the fourth and final instalment of GlobalCapital Asia’s capital markets awards announcements, find out which firms have been named the Best Asian Investment Bank and the Best Investment Bank in the region for 2019.

  • GlobalCapital China announces 2019 awards winners: Part I

    GlobalCapital China, previously GlobalRMB, is pleased to announce the winners of its annual capital markets awards, honouring the banks, companies and individuals that have made the biggest contribution to bridging the gap between China’s markets and the rest of the world. In part one of the awards, we reveal the most impressive issuers in the FIG, corporate and SSA categories.

  • GlobalCapital Asia capital markets awards 2019: Bonds

    In part three of GlobalCapital Asia's awards results announcements, we reveal the winning bond deals across a variety of categories. In addition, we also name the Best G3 Bond House, Best High Yield Bond House and the winner of the Best House for SRI Financing.