Chinese credit crackdown felt overseas

February 9, 2014 7:21 pm

Chinese credit crackdown felt overseas

By Henny Sender in New York

China’s vast development bank has begun asking some international clients to postpone drawing down previously committed credit lines, in moves that highlight how strains on the country’s financial system are reverberating abroad.

Regulators in China have been trying to rein in rapid credit growth by making it harder for banks to move assets off their balance sheets, and by pushing up the cost of borrowing in the money market.

This crackdown has been aimed in large part at the country’s shadow banks – lightly regulated lending institutions that serve risky clients. But the impact has been felt throughout the financial sector, even hurting China Development Bank, a lender fully owned by the state.

CDB has asked several foreign clients in recent months to delay drawing down lines of credit that had previously been offered, according to individuals with direct knowledge of the matter. Two Indian companies – an infrastructure developer and a shipping group – were among those told to wait before accessing promised credit lines, the individuals said.

At the same time, CDB and Export-Import Bank of China, another state-owned lender, have shown greater willingness to put international borrowers into bankruptcy and sell their assets on the international market in an attempt to recover value from failed loans.

Last week in New York, court filings show that Overseas Shipping Group of the US is attempting to sell five ships to the GSO arm of Blackstone on behalf of Eximbank. Last year other investors bought ships that Torm

of Denmark sold on behalf of CDB. In the past, such assets would have been sold in China at below-market rates, some investors have told the Financial Times.

The lending cutbacks and more aggressive loan management by CDB and Eximbank are indications of how the Chinese government’s attempt to clean up shadow banking by raising interbank rates is affecting the heart of its financial system.

CDB and Eximbank have become pillars of international development finance, together lending more to governments and companies in developing countries than the World Bank. Chinese banks have in recent years significantly stepped up their international lending, which in 2013 was up 60 per cent by value on 2011.

Their funding largely comes from selling bonds to other Chinese banks, but that has become more difficult because of the system-wide tightening of monetary conditions and more attractive investment returns elsewhere.

In June when China was hit by the first of two cash crunches last year, and lending rates in the interbank market spiked, CDB cancelled a bond issue. In November it was forced to cut a proposed Rmb24bn deal by 60 per cent to Rmb10bn.

Moreover, the cost of borrowing for development banks has soared. While 10-year government debt yields are up about 100 basis points over the past year, the yields for CDB and Eximbank bonds have climbed almost 200 basis points.

“Credit pricing is so messed up in China today that CDB has a lot of trouble raising capital by offering bonds at the usual low rate,” says Chen Zhiwu, a US-based academic who sits on the boards of several financial institutions in China.

CDB did not respond to requests for comment. The Indian companies could not be reached. The original size of the credit lines was not disclosed.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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