(Bloomberg) – Even as tough regulation in China raises concerns among investors about the outlook for the corporate sector, one part of the credit market signals confidence that domestic companies will continue to grow.
Debt deals, in which organizers guarantee all commitments prior to syndication, are gaining traction in China and Hong Kong. So-called underwriting loans suggest organizers are optimistic about the outlook for borrowers, as managers will be stuck with more debt than they intended to hold on to if not enough lenders subscribe to it in the primary market. They may have to sell it to investors later at a lower price.
This funding raised outside mainland China for Chinese and Hong Kong firms increased 35% to $ 9 billion in the first half of 2021 from a year earlier, the highest since the first six months of 2019, data compiled shows. Bloomberg. At least two deals were signed in July, and bankers say more deals are likely to be struck this year.
The popularity of loans is a sign that despite market turmoil in China, with regulators restraining industries from technology to real estate, investors are confident that the economy will continue to expand and support the corporate sector as a whole. Chinese companies reported higher earnings in the first half, with margins for companies included in the Shanghai Shenzhen CSI 300 index surging to 10.1% from 9.76% in 2020.
Bankers love guaranteed loans because their offer can help them get mandates in a competitive market, and they usually earn more commissions than regular debt deals.
But demand for them could decline if China’s tough regulations affect corporate activities. The restrictions have already led to a reduction in the use of debt by Chinese companies to pay for overseas mergers and acquisitions, while the amount of such debt should be reduced to a seven-year low.
Read more: China’s crackdown undermines demand for loans to finance overseas mergers and acquisitions
For now, ample liquidity in the credit market supports bankers’ optimism about the prospects for underwriting loans for Chinese firms, as the country’s economic recovery looks set to continue.
There are signs that China wants to convince investors about the prospects for financial markets.
The official Xinhua News Agency said that a stronger Chinese economy is a guarantee and a basis for capital market development after a ban on online learning firms triggered a massive stock crash. And the securities regulator called a meeting with major investment banks, including international lenders, on Wednesday night to allay fears that the country’s recent policy targeting the education sector will harm other industries.
Credit market liquidity recovered in 2021, according to Andrew Ashman, head of the Asia-Pacific loan syndicate at Barclays Bank PLC. He says the appetite for underwriting loans now matches levels seen before the Covid-19 pandemic.
(Adds Xinhua commentary and China’s meeting with banks in the penultimate paragraph.)
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