November 23, 2018 / 8:35 AM / 20 days ago

China policy shift gets cool response

* Loans: Chinese private-sector borrowers still face challenges overseas

By Yan Jiang

HONG KONG, Nov 23 (LPC) - Government measures to help China’s private sector access cheaper onshore funding will have little impact on the availability of overseas finance, according to loan market specialists.

Beijing announced a slew of new measures in October and November to boost liquidity for privately owned enterprises (POEs), including easier bond and IPO issuance and lower lending rates.

The moves are designed to support China’s economy and offset the effects of a trade war with the United States. However, bankers working on offshore loans for POEs still see the sector as tarnished.

“Our house view won’t change simply because of such short-term policy,” a senior banker at a global lender in Hong Kong said.

“Our credit risk department might ask: Why is the Chinese government doing so now? Is something really going wrong?”

POEs have suffered disproportionately from the government’s campaign to deleverage the financial system. At least 10 ailing private groups have been nationalised this year as China’s shadow banking sector also retreated.

President Xi Jinping held a roundtable with private entrepreneurs on November 2 in which he outlined plans to support the private economy and help POEs resolve their difficulties.

Xi rolled out six guidelines including tax cuts and easier financing, which were followed by detailed implementation plans from various ministries, including the central bank and the securities regulator.

Bankers, however, see government support as insufficient to change their lending criteria until the companies improve their financial performance, lift investment yields and improve corporate governance and transparency.

The rising tide of defaults in the last two years has made debut offshore loans more difficult. Bankers still have fresh memories of China Huishan Dairy Holdings, once the country’s largest integrated dairy farm, failing to repay loans and the inability of China Hongqiao Group, the world’s largest aluminium producer, to publish its financial results on time last year.

S&P credit analysts Cindy Huang and Chang Li said in a November 19 report the latest measures would ease the risk of default.

“The short-term default risks for major POEs will reduce as policy signals should improve market confidence and investor sentiment,” the analysts said. “Lenders will likely be more inclined to refinance maturing loans and private credit lines.”

COORDINATED EFFORT

China’s central bank said on October 22 that it would make another Rmb150bn (US$21.6bn) of relending and rediscount loans available for banks to funnel to POEs, taking this year’s total to Rmb300bn.

The People’s Bank of China will also help more POEs to issue bonds by providing initial capital to encourage the use of credit mitigation and enhancement tools.

The China Banking and Insurance Regulatory Commission is also proposing to instruct major Chinese banks to target at least a third of new corporate lending towards POEs.

Key industries such as infrastructure, advanced manufacturing, high technologies and environmental protection are more likely to benefit.

Chinese and international banks have traditionally preferred to lend to state-owned enterprises, which have varying levels of sovereign support and are better funded.

China is rated A1/A+/A+, and companies with explicit sovereign support can finance themselves at cheaper rates.

Chinese SOEs have raised US$9.7bn in the offshore loan market so far this year, while POEs have raised US$6.4bn, according to LPC data.

Despite the government’s show of support, bankers have limited appetite for loans in the private sector. Eight of the POEs that tapped the offshore market since May are still struggling to close their syndicated deals.

Arranging banks are also finding it hard to bring any new POEs to the offshore loan market, and many of the companies are currently focussing on paying down dollar debt.

Internet giant Tencent Holdings played it safe when it raised its first offshore loan in 2014, testing the market with a small US$200m five-year facility that attracted five banks in total.

Two years later in the second half of 2016, the company was able to raise US$3.5bn to back its acquisition of a majority stake in Finnish mobile game developer Supercell in less than three months.

“POEs need to gradually and carefully build up their track record for many years before they can have a strong net of relationship banks,” a second banker in Hong Kong said. (Reporting by Yan Jiang; Editing by Chris Mangham and Steve Garton)

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