This article was co-authored by corporate bankers at a large global bank and a Big 4 Chinese bank and an investment banker from a Bulge Bracket, all working in the Hong Kong Special Administrative Region
Corporate Banking is a huge market in China, and as the economy grows (at a much faster pace than mature markets in North America and Europe, and at a faster clip than Latin American countries due to a pro-business establishment) and capital markets deepen, it can only become a larger center for corporate banking going forward
Our focus, regardless of the domicile of the borrower, is going to be on Hong Kong and Singapore, as corporates and lenders will choose to have credit documentation in a jurisdiction where there are strong legal frameworks that are internationally recognized. Hong Kong alone has more than 5,000 banks domestic and international with operations on Hong Kong Island or Kowloon.
We look less at investment banking due to a reduced emphasis on traditional valuation – corporations are growing at a very rapid pace and valuations are unstable due to large retail investor bases.
Corporations also tend to be either state-owned and loathe to release sensitive information to bankers or key man controlled, where decisions will not necessarily focus on near-term accretion (Chinese like to plan for generations). Corporate advisory tends to take a back seat as most large Chinese corporates have management that already know what they want to do, with bankers keeping to due diligence and execution as opposed to idea generation.
Fees are also very low as companies expect and can pay minimal commissions (fees are halved for ECM, DCM and M&A vs mature North American markets) with support from domestic investment banks. Winning deals is more heavily based on relationships instead of sound advice.
Corporate Credit Products in Hong Kong
Unlike the west, where debt is more permanent in the capital structure via long-term corporate bonds, China has less developed capital markets and fewer corporate bond/bullet term loan (TLB) investors, so most corporates will borrow using amortizing term loans (TLA).
The largest corporates still have good access to corporate debt markets and may issue bonds, but this is still a relatively small part of the market. As such, ECM is considered more prestigious than DCM in China. Due to a smaller investor base and less defined legal protections in China, we expect the status quo to remain for some time to come.
Chinese corporates will rarely have committed revolvers for liquidity, and working capital facilities are even more cumbersome. Multinationals in China prefer large uncommitted bilateral lines of credit, whereas Chinese companies may have some but tend to hold large quantities of cash-on-hand for liquidity instead.
Key Players in Chinese Corporate Banking
HSBC is Hong Kong’s leading bank and is considered a gold standard for employment. Standard Chartered and Bank of China also have prominent operations on the Island. Both institutions will be part of every major loan syndicate and have strong financing arms (DCM, ECM, Securitization).
However, both banks have smaller presence in mergers and acquisition and other corporate advisory as these markets are still dominated by the traditional bulge brackets Goldman Sachs, JP Morgan, Morgan Stanley, UBS and Credit Suisse.
As Chinese corporates continue to grow at a fast clip and red tape continues to be cut allowing for increasingly nimble entrepreneurship (an initiative of the Xi-Li Administration), Chinese lenders are beginning to creep up the league tables. Due to other SOEs listing in Hong Kong for better liquidity and market access, loan syndication tables are now often presented as ex-SOE as commitments to any gargantuan loans to a China Mobile or PetroChina by the Big 4 Chinese SOE Banks (Industrial and Commercial Bank of China, Bank of Communications, Bank of China, China Construction Bank) will skew credential presentation. These banks may also offer rates uneconomic for publicly-owned banks.
All 5 Big Canadian banks have operations in Hong Kong. RBC Capital Markets has sizable presence across a variety of product offerings, with a large sales and trading team and good investment banking representation. CIBC has historically been the largest in Asia, but has seen operations scale back after the sale of Oppenheimer – that said, CIBC continues to be the lead bank for all organizations associated with Li Ka Shing’s Cheung Kong Group, which is the largest and most important corporation(s) in Hong Kong.
Li Ka Shing used to be a large shareholder in CIBC, but has since donated his equity. Nonetheless, CIBC continues to be the relationship lead for all Li and Cheung Kong controlled assets in Asia and Canada (notably, Husky Energy). As commodities have taken a tumble (the rise led by Chinese expansion and the fall led by Chinese contraction), Canadian assets have fallen out of favor and Canadian banks have taken on a reduced role in the city. Recall that the CNOOC-Nexen merger was brokered by BMO Capital Markets.
Interest Rate Benchmarks in China
To understand on what basis banks will lend on, we must outline the relevant central banks. Although Hong Kong is a part of the People’s Republic of China, it has an autonomous institution which serves as its central bank (officially, a currency board) – the Hong Kong Monetary Authority.
HKMA is currently headed by Norman Chan. The Hong Kong Dollar (HKD) is pegged to the USD, at an exchange rate of ~7.8 to 1. The People’s Bank of China is the PRC’s central bank and is headed by Zhou XiaoChuan. The Chinese Yuan (CNY) floats within a range of a selected currency basket (previously was also pegged to the USD).
In Hong Kong, many large corporates will have their loans benchmarked to the Hong Kong Interbank Offered Rate (HIBOR) – recall that HKD is pegged to USD (we would argue it should be pegged to RMB, but that is a separate discussion), so this will be close to LIBOR.
For State-Owned Enterprises (SOE) or companies with large China operations, the People’s Bank of China (PBOC) rate may be used (unlike HIBOR – which is the rate at which banks lend to each other, there is no implicit credit spread for PBOC as PBOC has no default risk, so the incremental margin must be higher than that of HIBOR). Accordingly, depending on the creditworthiness of the borrower, an appropriate margin to HIBOR or PBOC will be applied.