Despite a lot of things working against most Chinese corporates right now, they do have one bright spot: access to the loan market at reasonable pricing levels.
This is mainly because China has adopted a relatively loose domestic monetary policy since the beginning of the year.
For example, the People’s Bank of China cut the loan prime rate, China’s benchmark lending rate, in May. It sliced the five year LPR to 4.45% from 4.6% — the largest reduction since 2019 — while the one year was kept unchanged at 3.7% following a 10bp cut in January.
On the flip side, dollar fundraising is becoming more expensive due to the US Federal Reserve’s interest rate hikes. In mid-June, the US central bank raised rates by 75bp to 1.5%-1.75%. This was its largest hike since 1994. The Fed is also expected to rise rates by another 75bp later this month.
Against that backdrop, it makes sense for Chinese borrowers to try to fund themselves through onshore loans, while eschewing dollar transactions except for refinancing old dollar debt.
But taking such an approach would be a mistake. China Inc should embrace offshore dollar loans too now before it’s too late.
The reason? Borrowers have the ability to negotiate hard on pricing in dollars. A combination of slow deal flow and abundant liquidity mean banks are on the hunt for firms to lend to. The market is still reasonably resilient despite volatility wreaking havoc across bonds and equity markets. For a decent credit, banks are willing the lend, even if at thin pricing levels.
But this advantage may not last long. Whenever China lifts its pandemic restrictions and business activities get back to normal, more firms will be vying for dollar loans to fund their capital expenditure and expansion needs.
On top of that, once valuations stabilise, more M&A opportunities may emerge, be it China outbound or other cross-border trades. This means supply would get a fillip — and could eventually make banks picky about the deals they want to lend to. Hong Kong is also sending the right signals about potentially opening its borders towards the end of the year. This, too, could open up the deal tap.
The bond versus loans conversations is also getting more focus, with banks increasingly offering clients the gamut of funding options given choppy bond conditions. Whenever some of these bond deals move to the loan market, supply will get a boost.
All this means Chinese borrowers sitting on the fence about raising dollar loans should not wait any longer. Markets are fluid and quickly changing, so pricing may very well go up sooner rather than later. Borrowers should act now.