Chinese banks rely on local branches for offshore debt
The use of ‘inefficient’ branch networks for fundraising goes against international practice, but mainland banks gain marketing benefits
When it comes to their offshore debt programmes, mainland banks embrace the mantra of thinking globally and acting locally.
Looking at all offshore debt issued by the five biggest mainland banks since 2007, almost all (92 per cent) was raised at the local level, through offshore branches, subsidiaries and special purpose vehicles. This cuts against the grain of international practice and suggests major inefficiencies. When the mainland banks issue at the local level (for example, Bank of China’s Singapore branch), the funding stays with that entity, and cannot be easily redeployed through the global bank. Thus, if the local branch raises too much money, it will just sit unproductively on the balance sheet, or if it raises too little, it will have to go back to the market to raise more cash.
“They [mainland banks] are missing a single integrated shelf programme that allows them to access all types of funding irrespective of market, tenor, currency … which allows more flexibility,” said one international bank’s head of Asian debt capital markets.
All international banks consolidate their fundraising at the group level. They can raise money in whatever market offers the best terms, and then move the cash to whatever branch needs it most. If a transaction involves local taxes, they can track these tax commitments as the capital is moved from branch to branch, using a centralised treasury operation.
“The way the international banks do it is more efficient, because they have a small group of people at head office to handle documents and legal matters and handle a small group of bankers, so they can accumulate market intelligence,” said Christine Kuo, a senior credit officer at Moody’s.
The sums involved are vast and small inefficiencies quickly add up. The five biggest mainland banks – Bank of China, Bank of Communications, Agricultural Bank of China, Industrial and Commercial Bank of China and China Construction Bank – have raised a combined US$86 billion in offshore debt markets since 2007, according to Thomson Reuters, when their offshore funding began in earnest.
There are a number of reasons mainland banks do it this way. They are expanding into offshore markets, and issuing at the branch or subsidiary level is a quick way to get cash to these operations so they can boost lending to clients in those markets.
There is also a policy dimension. The central government is pushing the state-controlled banks to issue offshore yuan bonds through their local branches to promote use of yuan in centres such as Sydney, London, Singapore, Frankfurt, Luxembourg and, of course, Hong Kong
Last week Bank of China’s Paris branch issued a two billion yuan (HK$2.5 billion) bond. The branch has a growing yuan business in France, largely to provide trade finance to businesses in Africa that are trading with China, with Paris a trade finance hub for French-speaking African nations. Beijing wants to encourage investors in centres such as Paris to hold yuan, and that means more yield-paying securities in yuan need to be provided in those markets. The yuan bonds issued by the banks address that need.
Issuing at the branch level helps the bank target investors in a given market. While Bank of China does not need to issue through the Paris branch to get French investors to buy its bonds, issuing via that branch and using French banks to sell the deal a month after a European tour by Premier Li Keqiang creates an impact.
A third of the BOC deal was sold to European accounts, with French accounts the second biggest investor group by geography.
“It’s a marketing strategy. At the end of the day, Bank of China [the parent entity] issuing a bond is the same as Bank of China Paris branch issuing a bond. But it does help focus distribution when you issue through the branch at the local market level – bringing new investors,” said Benjamin Lamberg, a global co-head of Asia syndicate at Credit Agricole CIB, which was a bookrunner on the BOC deal.
There are also regulatory issues. Mainland banks need permission from the National Development and Reform Commission to issue offshore. But they can get around this if they issue offshore through their branches or subsidiaries, even though the parent is legally responsible for repayment.
“Without NDRC approval you cannot issue offshore. That is the law. But using the branch, it’s OK … that seems to satisfy this requirement,” the debt capital markets head said.
