Chinese banks follow belt and road map to expand loan book as liquidity tightens at home

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BOC Macau raised US$138 million via three-year yuan bonds and said the proceeds will be used to fund projects located in the Belt and Road Initiative partner countries

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SCMP Reporter

Published: 6:00am, 1 Jul 2024

Chinese banks are heading overseas to expand their loan books and fund Belt and Road Initiative (BRI) projects, but such a bold strategy may not be employed by lenders who are unfamiliar with the assessment of credit risks in the countries along the route.

The belt and road project was spearheaded by Beijing and endorsed by President Xi Jinping in late 2013, aiming to improve trade and economic integration across Asia, Europe and Africa.

Bank of China priced three bonds in overseas markets last week as its Macau, Panama and Hungary branches sold US dollar-denominated and offshore yuan-denominated bonds to raise US$1billion-equivalent of funding. This came on the heels of significant commitments made by other Chinese lenders, such as China Development Bank and Bank of China.

“According to our data, nearly half of Chinese overseas loans are in yuan, which is huge compared to a few years ago,” said Alicia Garcia Herrero, chief Asia-Pacific economist at Natixis. She estimated that China Development Bank had loaned about US$100 billion while Bank of China had already committed to US$20 billion in loans.

Garcia Herrero said liquidity conditions in China are very tight and that even if the People’s Bank of China (PBOC) were to inject funds and make conditions accommodative, liquidity is leaving the country, which is reflected in reserves hardly increasing despite the large trade surplus.

This photo taken on May 27, 2021 shows the Kaposvar solar power plant built by China National Machinery Import and Export Corporation (CMC) in Kaposvar, Hungary. Photo: Xinhua

“Belt and road linked institutions are semi sovereign,” said Andy Xie, a Shanghai-based independent economist. “They can raise money like the World Bank and Asia Development Bank. An important goal in their fundraising is to maintain a liquid market for their papers. I suspect that this goal is driving what’s going on.”