China offshore borrowing hits record

Acquisitions and speculation on yuan revaluation help increase lending to US$3.8b so far this year

China's offshore borrowing levels have soared to record highs this year, powered by several high-profile acquisitions and widespread speculation on a yuan revaluation.

Borrowing by mainland firms from overseas lenders has reached US$3.8 billion so far this year, approaching the record US$4.94 billion for the whole of last year, according to a report from debt newsletter basis point.

The numbers are compiled from banking industry estimates and include only loans involving more than one bank.

'The total borrowing is actually quite a lot more [than US$3.8 billion] and is growing very quickly,' said Vincent Chan, China strategist at Credit Suisse First Boston.

The State Administration of Foreign Exchange (SAFE) released figures in May showing the nation's total stock of outstanding external debt rose to US$233 billion at the end of the first quarter from US$228.5 billion at the end of last year.

Most loans included in the SAFE figures were extended to Chinese corporations; government offshore borrowing constitutes only a tiny percentage of the total.

China's capital account remains closed and Chinese-registered companies must obtain SAFE approval to borrow offshore.

Many firms have nonetheless managed to acquire loans abroad, enabling them to purchase yuan at rates widely seen as unsustainably cheap. Yuan revaluation makes foreign currency loan repayments cheaper, possibly exceeding the interest due on the loans.

China revalued the currency upward by 2.1 per cent last week and many analysts now expect Beijing to allow it to gradually appreciate further over the long term.

'If you are a Chinese company and you expect the renminbi to appreciate, it makes sense to borrow in foreign currency and invest in domestic assets,' said Mr Chan.

Acquisition-related loans have been a major driver for offshore borrowing. In the first quarter, China's largest computer maker, Lenovo Group, secured a five-year US$600 million syndicated loan from 20 banks for its purchase of IBM's personal computer business.

Last week, Sinopec Group launched a US$1.1 billion five-year loan to sub-underwriters, part of which is expected to be used to fund investments in Angola, according to the basis point report.

Mizuho Corporate Bank, National Australia Bank and Rabobank were arranging a US$120 million, five-year facility for Citic Resources Holdings, the report said.

Under the terms of Hong Kong-listed CNOOC's bid for United States oil company Unocal, the company would finance the deal with US$3 billion in cash and US$16 billion in debt.

'Large resources companies are the most likely to borrow offshore for acquisitions, whereas other companies borrowing overseas are likely to be speculating on currency appreciation,' Mr Chan said.

Another reason for the jump in offshore borrowing is the official tightening of liquidity introduced in April last year by the central bank.

'A lot of firms were unable to get loans domestically so they went out, formally and informally, to borrow offshore,' said Jun Ma, Greater China chief economist at Deutsche Bank. He added that 8 per cent of Hong Kong bank loans were used in China, and the proportion was expected to rise.