by Simon Pirani
The specialist commodity banks are set to open up a vast new market in onshore lending to second-tier Chinese metals producers.
Restrictions on renminbi lending by foreign banks are being loosened, and western bankers said they could be providing corporate finance in the local currency as early as next year.
Regulations on lending to Chinese companies in US dollars are being relaxed, too. This may broaden the market for import finance, in the past limited to “window” traders (firms offshore, for example in Hong Kong or Singapore, owned by the largest Chinese producers) and foreign-owned enterprises.
The explosive growth of Chinese demand for metals and raw materials forms the background to the changes. “Eventually the rules will allow foreign banks to provide the same range of services as Chinese banks. We need to prepare for it,” Raoul Bajaj, head of the Asia-Pacific region in the structured commodity finance team at Fortis Bank, told MB.
Fortis, UFJ and Raiffeisenbank are the most significant players in financing Chinese metals companies.
A change to banking regulations enacted earlier this year made it possible for Western banks to apply for a full licence, permitting them not only to finance foreign-owned enterprises, as they have in the past, but also domestic companies. The licences only cover 13 cities, but within two years that restriction will be abolished.
“This allows foreign banks to target all Chinese corporates, whether state- or privately-owned, which were in the past off limits. It also permits foreign metals companies to establish Chinese subsidiaries,” said Steven Jin, assistant general manager at Fortis Bank Shanghai, one of the first Western banks to be granted the full licence.
Renminbi lending licences may also enable banks to expand their stock financing business, which has been a key relationship-builder with the Chinese industry in recent years. So far, foreign banks have concentrated on financing cargoes in bonded warehouses managed by recognised collateral managers; renminbi licences may help them extend the business.
“Non-bonded-warehouse financing has been selectively offered by some foreign banks, but the lack of a definitive legal framework covering ownership of the cargo has hindered the development of stock financing. The availability of renminbi licences may improve the situation,” Jin at Fortis commented.
Other regulations that limit the renminbi balance sheet of foreign banks’ Chinese subsidiaries could cause problems, a Beijing-based trade financier at another Western bank cautioned. “The foreign bankers’ association has indicated to the authorities that balance sheet restrictions make it impossible to build up a serious lending business, and that these will have to change,” he said. “Until then, foreign banks will be limited to the cross-border business.”
In July this year another key change was made to banking rules, easing restrictions on dollar borrowing by Chinese companies: a regulation limiting domestic producers’ foreign exchange borrowings to quotas from the State Administration for Foreign Exchange (SAFE) was repealed. This opens up the prospect of Western banks arranging import finance for domestic producers.
“Foreign banks’ clientele was limited to foreign-owned companies, traders based offshore and those with a SAFE quota. Now foreign banks in China can target corporates for US dollar lending without geographic restrictions. This is seen by the government as a step towards fulfilling its promise to the WTO of financial services market liberalisation,” said Jin at Fortis.
Longer-term structured deals have been done for the Datuhe and Zhinhui metallurgical coke plants, and the Henan and Xiangfen aluminium smelters — but these deals, collateralised on exports, do not address the problem of financing the domestic boom.
“In the last 18 months or so many small and medium sized enterprises are coming on the scene and seeking financing. Obviously the large state banks are tough to compete with, and documentation is problematic, but there is great scope, and the commodity banks understand that,” said David Sullivan of Trade Finance Corp, which puts together small deals for Chinese corporates.
This article first appeared in Metal Bulletin, 16 November 2004.
Posted May 2005; © 2004 Simon Pirani