Chinese banks find their credit in high demand

By Ariana Eunjung Cha
Washington Post Foreign Service
Saturday, January 2, 2010; A01

BEIJING -- China's state-owned banks have become a main engine of the global recovery, financing the construction of copper mines, purchase of airplanes, expansion of retail stores and other projects even as their U.S. and European counterparts scale back lending.

The surge in Chinese lending, triple the 2008 rate, has provided a lifeline to international corporations during the worst recession in decades, and it reflects a diversification in China's global economic role beyond its holdings of vast amounts of U.S. government debt.

Over the first nine months of 2009, new lending by Chinese banks has injected $1.3 trillion into the world economy, according to statistics from the People's Bank of China, which functions as China's central bank. The beneficiaries have included U.S.-based Southwest Airlines, the Netherlands' Aercap airplane leasing company, Civil Aviation Authority in Dubai, and Foster's brewery and Woolworths supermarket chain in Australia.

China's banks have been signing so many new loan contracts so quickly that the country's banking regulatory commission recently warned them to avoid the "blind" pursuit of size lest they run into the same troubles as their Western counterparts.

The bulk of loans from Chinese banks are staying in the country, and the central bank has not released an official breakdown between foreign and domestic loans. But bank analysts who have reviewed the public data estimate that the amount going to overseas companies has doubled in the past year to represent roughly 11 percent of all new loans, a shift that would appear to reflect an effort by China to diversify its holdings beyond U.S. Treasurys.

As recently as five years ago, China's big state-owned banks were seen as old-fashioned, bureaucratic behemoths that could barely handle personal checking accounts, much less the complexities of international financing. But by the time the financial crisis hit in 2008, they were in a strong position, thanks to management shake-ups and an injection of capital from the Chinese government that helped them get rid of their nonperforming loans.

The biggest of the state-owned banks, the Industrial and Commercial Bank of China, is now the world's largest by market capitalization (although that status changes day to day) and the most profitable.

As of October 2009, Chinese banks held $5.8 trillion in outstanding loans, outpacing Japan, according to the International Monetary Fund. That figure reflected a 22 percent increase over the first 10 months of the year, a period in which outstanding loans held by U.S. banks shrank by 7 percent, to $6.7 trillion, and loans held by European banks stayed flat, with little in the way of new lending.

Loans as stimulus

The bank loans are a key part of China's $586 billion stimulus package, often nicknamed the country's "New Deal." While the stimulus is largely directed at domestic infrastructure projects like highways and bridges, it is also helping inject large amounts of liquidity in other countries around the world. According to an analysis by Bloomberg, seven Chinese banks made syndicated loans overseas in the first 10 months of 2009 as compared with three in the first 10 months of 2008.

"China's banking industry is operating well, without being affected by the crisis. In contrast, the banks in the West lost a lot, and therefore their capacity to make loans was influenced and became lower," said Guo Tianyong, director of the Chinese Banking Research Center at the Central University of Finance and Economics in Beijing.

With Citibank, HSBC and other traditional lending institutions sidelined by their own internal problems, Chinese banks jumped in and took their place in a number of important transactions.

"In the past year, Chinese banks made many top headline deals. In good times, such deals would not have fallen into the hands of Chinese banks," said Fan Bing, chief China representative of South Africa's Standard Bank Group, which signed a $1 billion loan deal with four Chinese banks in September.

In interviews, officials of several companies that received loans from Chinese banks said that they received much more than they sought.

Things looked bleak when Peter Fredricson's energy company in Australia was looking to refinance its loans this year. Most U.S. and European banks it had worked with had either reduced their lending or pulled out of the country altogether.

Then a new financier -- Bank of China -- showed up, with a representative explaining that the bank was expanding its operations in Sydney and seeking new opportunities.

Fredricson, chief financial officer for the APA Group, asked whether the bank would consider a $90 million loan. It wasn't long before the Chinese responded: How about $110 million?

Appetite for risk

Similarly, there was so much interest from Chinese and other Asian banks that when Dutch commodity trading company Trafigura sought $505 million in revolving credit in November, it ended up receiving $700 million.

The lenders included the Agricultural Bank of China, the Industrial and Commercial Bank of China and Minsheng Bank. Pierre Lorinet, Trafigura's chief financial officer, called the commitments from China "groundbreaking." He said that during his efforts to raise funds this year he found a striking difference in the sentiment of European banks versus Chinese and other Asian banks: "There's more appetite for credit risk in Asia."

Klaus Heinemann, chief executive of Aercap, which is based in Amsterdam, also said a Chinese lender approached his company offering assistance. While Heinemann said that Aercap was not having trouble securing loans, it seemed smart to work with a lender in the world's fastest-growing major economy. Aercap ended up taking $1.7 billion from China Development Bank.

"It's the first time for us to take money from a Chinese bank," Heinemann said.

Qu Hongbin, chief China economist for HSBC, said part of the reason for the increase in lending by Chinese banks overseas is that the global financial crisis showed that China needs to diversify its holdings. Much of China's $2.3 trillion in foreign reserves remain invested in U.S. Treasurys, but Chinese leaders have repeatedly expressed worry about the value of their U.S.-dollar denominated holdings as the U.S. economy faltered.

These days economists say China would do well to move its foreign reserves into anything but U.S. government-backed holdings. "As the amount of dollars flowing in from trade continues to increase each year," Qu said, "the need for the dollars to be recycled out of China grows with it."

Researcher Zhang Jie contributed to this report.

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