China banks step up bond market push

Mon Aug 12, 2013 6:13am EDT

* Mainland lenders eye share of international bond market

* Longyuan Power latest to reward lenders with bookrunner roles

* Underwriting fees would help diversify income streams

By Timothy Sifert and Carrie Hong

Aug 12 (IFR) - As economic growth slows, China's banks are redoubling efforts to gain market share outside traditional bank lending and in higher fee-earning sectors like US dollar bond underwriting - typically the domain of bigger global firms.

They are hoping to tap into a recent bond-market boom across Asia. Issuers in the region sold US$90.5bn worth of bonds in dollars, euros and yen in the first half of the year, up 18.3% year on year and a record for the first six months of any year.

However, none of the top 10 bookrunners in Asia G3 bonds during the period was Chinese, something banks in the PRC hope to change. They hope they can mirror the success they have had in recent months in Asia's loan league tables, where they have steadily climbed the ranks.

As Chinese borrowers expand abroad, more banks are looking to follow their domestic clients into the international capital markets and turn existing lending relationships into bonds business.

A similar strategy of generating capital markets income from existing corporate clients has helped international lenders, such as Standard Chartered, move up the Asia term-debt league tables recently. StanChart ranks fifth on the second-quarter league table for Asian fixed-rate and floating-rate G3 bonds, with 7.8% of the market. That is up from eighth place for the same period in 2011, when its share was 5.0%.

"As more Chinese corporates seek to expand their business beyond the domestic market, there will be a growing need for offshore capital raising and the debt capital market, with its depth and breadth, has traditionally been one of the most common and flexible sources of funding," said Geoffrey Zhao, director, debt capital markets, Citic Securities International, the Hong Kong-based offshore platform of China's Citic Securities.

The PRC parent was top of the league table for all Chinese renminbi bonds in the second quarter, with a 10.9% market share. The Hong Kong unit of the investment bank, meanwhile, has been intent on building out its business platform abroad.

"Offshore bond issuance, whether in offshore renminbi or in a G3 currency, is often a means by which a Chinese company engages international institutional investors and builds its profile in the global capital markets," Zhao said.


PRC firms - lenders and investment banks - are not only heading abroad in search of bond business, they are generally looking to diversify revenue streams. The shift should also please mainland regulators, who have voiced concerns about runaway lending in recent months.

Chinese regulators want their banks to cut dependence on loan income, in part to meet Basel III rules.

Diversifying income should help the PRC's private and state-owned lenders better manage the anticipated economic slowdown in the economy at home. The Chinese economy has slowed in nine of the past 10 quarters. Several estimates put this year's GDP at growth 7.75%, which will be the lowest annual rate of growth since 1999.

"As domestic pressures build, we believe there is a need for income diversification for the Chinese banks, and that includes both diversification in products and in geographies," said Grace Wu, executive director, head of Greater China FIG research at Daiwa Capital Markets. "Primarily the overseas expansion for Chinese banks is still targeted at following their customers, so regions with increasing trade flows with China will be the key focus areas."

As mainland firms set out to expand their bond franchises, their natural first port of call is Hong Kong, where paper is regularly sold in US dollars and renminbi.

State-owned China Longyuan Power Group's trade last week illustrated how Chinese banks could gain a larger share of the Asian market for US dollar bonds. The Triple B issuer enlisted Western banks Goldman Sachs, UBS and Morgan Stanley as bookrunners, but, in a boost to PRC firms, Citic Securities International, Wing Lung Bank and Agricultural Bank of China also participated.


Citic's participation is not surprising, given its track record in the area. However, it was only the third time Wing Lung Bank, a Hong Kong-based subsidiary of China Merchants Bank, had acted as bookrunner on a US dollar bond. Meanwhile, state-owned ABC - historically also a rare underwriter on dollar bonds - has worked on four fundraisings this year for PRC clients, including China Longyuan.

Bankers said the presence of Wing Lung and ABC on this transaction points to an increase in competition for overseas business.

Chinese underwriters are expected to be a larger part of the market in the future, according to Meng Xiaoning, senior portfolio manager at Bank of China (Hong Kong). "Many Chinese institutions - banks, securities firms - are planning to expand their business in the overseas market and usually the Hong Kong offshore market is their first target," he said.

Indeed, many Hong Kong units of PRC firms already have full investment banking licences, including for bond underwriting.

"Unlike the onshore market, where banks have a limited number of businesses, the banks/securities houses in Hong Kong are usually fully licensed firms with access to different types of business," said Meng. "Because of that, many newcomers are also trying to build up a capital market network with the support of their parent group company in the mainland."

Experience in the freer overseas markets may also prove valuable at home. This year, the China Securities Regulatory Commission, the National Association of Financial Market Institutional Investors and the People's Bank of China have all tabled proposals to liberalise and standardise rules for corporate bonds, medium-term notes and commercial paper.