(Bloomberg) -- Local Chinese banks are joining more higher-yielding offshore loans of mainland firms as rates fall at home amid China’s monetary easing measures.
Through branches located in cities like Shanghai, Shenzhen and Chengdu, Chinese banks have grown their wallet share in offshore China loans, supported by favorable cross-border rules, while filling a gap left by Taiwanese lenders. Their lending accounts for 16.1% of total liquidity raised for such facilities as of Oct. 31, the highest rate since 2016 and up from 12.5% the year before, according to Bloomberg-compiled data.
For instance, non-Hong Kong licensed banks such as Postal Savings Bank of China and Bank of Beijing in October participated in Chinese tire manufacturer Sailun Group’s $200 million offshore facility. Meanwhile, the Zhejiang branch of Hengfeng Bank joined panel maker Chint Solar’s €604 million-equivalent ($658 million) loan from September.
Although onshore banks have always been a constant liquidity source for the loans of mainland firms outside China, their participation has grown, and will continue to, due to the ongoing divergence in domestic and offshore rates.
“The relatively high net interest margin in the offshore market is one of the key reasons for Chinese banks’ overseas expansion,” said Phyllis Liu, a director at S&P Global Ratings. China’s banking sector has been experiencing a contraction in margins due to lower interest rates, which are expected to fall further with Beijing’s recent mortgage and policy rate cuts, Liu added.
In October, Chinese lenders had cut the loan prime rate to 3.10% from 3.35% after the People Bank of China slashed its policy rate by the most ever late September in a bid to revive its ailing economy. Conversely, the risk-free Secured Overnight Financing Rate, the reference for dollar deals, is hovering at around 4.86% following the Federal Reserve’s half-a-percentage-point reduction.
A further easing of China’s cross-border rules has also helped boost liquidity outside the world’s second largest economy. In 2022, the State Administration of Foreign Exchange relaxed restrictions imposed on onshore banks’ overseas lending, while limiting borrowers’ use of proceeds outside the country.
The Chinese regulator also urges local institutions, which typically extend credit offshore via the Shanghai free trade zone, to prioritize lending in yuan.
Meanwhile, dim sum loans — facilities denominated in offshore yuan — have benefited from this increase in cross-border activity. In August, Bank of Jiangsu and a relatively new Chinese lender, Evergrowing Bank, joined lithium battery maker Eve Energy Co.’s 1.45 billion yuan ($204 million) offshore facility. That tranche is part of a larger HK$3.7 billion-equivalent ($476 million) financing the company had signed.
Similarly, mainland firms stand to gain from tapping the offshore space. While the proceeds of dim sum loans raised by these companies are typically exchanged into dollars, repayment of the facilities remains in yuan, said David Li, a partner at White & Case LLP. That means they’re able to pay domestic rates to service their offshore debt, resulting in overall cost savings rather than borrowing directly in the greenback outside China, Li added.
“There is a need to minimize the impact of yuan depreciation on their ability to service US dollar denominated offshore borrowings,” said Li, adding that it makes sense for China-centric firms generating cashflows in yuan to raise dim sum loans.
Dim sum loans have grown to account for more than 8% of the offshore market year-to-date, rising from just less than 2% the previous year, according to Bloomberg-compiled data.
--With assistance from Caroline Chu.
©2024 Bloomberg L.P.