Chinese banks rely on local branches for offshore debt
The use of 'inefficient' branch networks for fundraising goes against international practice, but mainland banks gain marketing benefits
When it comes to their offshore debt programmes, mainland banks embrace the mantra of thinking globally and acting locally.
Looking at all offshore debt issued by the five biggest mainland banks since 2007, almost all (92 per cent) was raised at the local level, through offshore branches, subsidiaries and special purpose vehicles. This cuts against the grain of international practice and suggests major inefficiencies. When the mainland banks issue at the local level (for example, Bank of China's Singapore branch), the funding stays with that entity, and cannot be easily redeployed through the global bank. Thus, if the local branch raises too much money, it will just sit unproductively on the balance sheet, or if it raises too little, it will have to go back to the market to raise more cash.
"They [mainland banks] are missing a single integrated shelf programme that allows them to access all types of funding irrespective of market, tenor, currency … which allows more flexibility," said one international bank's head of Asian debt capital markets.
All international banks consolidate their fundraising at the group level. They can raise money in whatever market offers the best terms, and then move the cash to whatever branch needs it most. If a transaction involves local taxes, they can track these tax commitments as the capital is moved from branch to branch, using a centralised treasury operation.
"The way the international banks do it is more efficient, because they have a small group of people at head office to handle documents and legal matters and handle a small group of bankers, so they can accumulate market intelligence," said Christine Kuo, a senior credit officer at Moody's.
The sums involved are vast and small inefficiencies quickly add up. The five biggest mainland banks - Bank of China, Bank of Communications, Agricultural Bank of China, Industrial and Commercial Bank of China and China Construction Bank - have raised a combined US$86 billion in offshore debt markets since 2007, according to Thomson Reuters, when their offshore funding began in earnest.
