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Chinese banks have key opportunity in post Covid-19 bonds

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By Rashmi Kumar
19 May 2020

Chinese investment banks have a clear edge over their global counterparts when it comes to winning more offshore bond mandates from the country in the post Covid-19 environment.

The coronavirus has derailed a number of offshore dollar bonds since the outbreak started to spread across the world. Asia’s high yield market effectively shut before Zhenro Properties Group scored with a $200m deal last week.

Whole cities went on lockdown. Travel was brought to an abrupt halt. Investment bankers went from being on the road about half of their time, to working entirely from the comfort of their own homes. The world changed rapidly and dramatically.

Much of the world is still on lockdown but China is starting to return to normality. As a result, so is its issuer base.

Some Chinese cities have removed their lockdowns as the number of cases in the country continues to fall. Hong Kong’s bankers have also returned to their offices in small numbers, after having worked from home for more than a month. Singapore is still a few weeks away from reopening all businesses, but it has also loosened some rules in the past week.

This slow but steady return to some semblance of normality is undoubtedly good. But if there is one thing that will not see much relaxation just yet, it’s global travel.

China closed its borders to almost all foreigners at the end of March, whether they had a visa or not. Domestic travel was also restricted, making it hard for bankers to go from one province to another.

The rules for provincial travel have been eased. In most cases, if travellers provide a “green health code” and are from a low-risk area, they are not subject to the mandatory 14-day quarantine.

Those coming from outside the country have no such luck. China is redirecting all international flights bound for Beijing to one of 12 other cities. Travellers will be subject to testing and a 14-day quarantine in those cities before they can head to Beijing, in a bid to lower the chances of a second wave of infections in the capital.

What does this mean for investment banks, global and Chinese, and their huge client base in mainland China?

Video conferencing and virtual roadshows have been working fairly well for bankers, issuers and investors, so they are set to continue — but this is easiest for high grade and well-known issuers. When it comes to capital markets access for the hundreds of lower tier Chinese corporations and local government financing vehicles, it’s a whole different story.

That’s where China’s banks have a clear advantage over international peers.

Chinese banks have a huge network of branches and sub-branches in the mainland that cater to the regional client base. The Hong Kong investment banking arms of these Chinese banks should focus on that penetration for more business.

Due diligence on some of these companies in second and third tier cities is often a concern to international investors. This is even more the case now if they are unable to travel for a roadshow or a site visit. This is partly why high yield novel names from China have been rare in the G3 bond market since Covid-19 struck.

But Chinese banks can leverage on their domestic onshore network to provide that in-depth due diligence in a way that global banks ─ forced to watch from the outside ─ cannot do in anything approaching the same scale. By collaborating with their local regional branches, Chinese banks’ international arms can pave the way for some of those issuers to dip their toes in the offshore market.

This is a huge competitive advantage to those banks but could also be a boost to the wider market. If the investment banking arms of Chinese banks are able to increase co-operation with their onshore divisions successfully, deal flow can pick up quickly. Global banks will be able to muscle in on these deals after the heavy lifting has been done, although they may be forced to accept more junior roles than they are used to.

This does rely on international collaboration at China’s huge, often fractious, state-owned banks. That may be difficult to achieve given how even bankers working at the same institution in the same city sometimes see each other as bitter rivals. But Chinese banks have a rare opportunity to take the lead in offshore bond issuance from their country. They should seize it.

By Rashmi Kumar
19 May 2020