By staff reporters Fang Huilei, Wang Zhen and Zhang Na

From Caijing magazine

China’s bank regulators are promoting loan syndication as a healthy way to combine risk control with the large cash pots needed in coming years for major infrastructure projects, such as railway building tied to the government’s economic stimulus plan.

Heeding the call, the 39 members of the China Banking Association’s Bank Loan Syndication Committee recently decided that all loans for more than 3 billion yuan must be issued through syndicates.

To ensure that association members follow this new industry rule, the committee will review all large lending projects.

Nevertheless, many banks are eyeing syndication with caution. Some wonder whether the process is relevant, while others flat-out prefer keeping loan fees and commissions to themselves, rather than share the spoils with other banks in a syndicate.

Borrowers also pose a challenge, as some have balked at the idea of paying syndication-related fees to cooperating banks.

Bank association statistics say syndicated loans issued by Chinese banks increased more than 50 percent over the past three years. But these loans offered by groups of banks still represent only a small portion of total lending nationwide.

At the end of 2007, syndicate loans accounted for merely 3.5 percent of the more than 607 billion yuan in loans issued by banks across China.

Some banks are more enthusiastic than others. A pioneer in syndication is China Construction Bank (SSE: 601939, HKSE: 00939), which collected 370 million yuan in loan fees through syndicated deals over the past several years.

No doubt CCB’s attitude toward syndication improved after China Banking Regulatory Commission (CBRC) in 2007  gave banks permission to collect fees on syndicate loans.

Meanwhile, syndication’s ability to mitigate risks casts the lending system in a positive light among government policymakers. Officials with the CBRC, for example, stressed at a recent internal conference that bank risk positions would be focal point in 2009.

Experts say syndication can make sense whenever risk control is an issue, regardless of a project’s size. Yuan Yinghua, an official in charge of credit lending at China Development Bank, a policy bank, told Caijing that “if risks are difficult to measure, bank syndication should be adopted.”

Foreign banks incorporated in China often use loan syndication to disperse risks while guaranteeing decent returns. Although their interest income is rather small, these banks make money by charging agent and arrangement fees.

Indeed, foreign banks tend to favor loan syndication more often than domestic banks in China. A foreign bank executive told Caijing that foreigners prefer to form syndicates, even when lending as little as 300 million yuan, because they see more risk in government-backed infrastructure projects than domestic banks.

Foreign banks are more cautious in lending than Chinese banks, Huang Xiaoguang, president of Citibank (China) Co. Ltd., told Caijing.

Compared with foreign banks operating in China, domestic banks are more strongly encouraged to play a role in the government’s economic stimulus effort, led by a 4 trillion yuan spending plan announced last fall.

Railway infrastructure projects alone may attract 2 trillion yuan in new investments this year and 2010, offering plenty of room for loan syndication. For example, 50 percent of the capital needed for a proposed high-speed railway project for the Beijing-Shanghai corridor is expected to be provided through syndicated loans.

According to a knowledgeable source, CBRC has long hoped that railway projects would be financed through syndicated loans. But until now, bankers have preferred negotiating loans separately with railway authorities.

The source said railway authorities do not oppose syndication but want the lead bank in a syndicate to shoulder responsibilities and ensure that capital is available when needed. “The core (railways requirement) is a favorable lending rate and good service,” the source said.

The Ministry of Railways is currently negotiating with three banks separately for loans. “We have signed a strategic cooperation memorandum with CCB, ICBC and Bank of China,” a ministry source told Caijing “But this is only a framework. No details have been worked out.”

Meanwhile, doubts have been raised about the credit-worthiness of some proposed infrastructure projects. A senior banker told Caijing under condition of anonymity that some projects simply do not meet bank lending requirements.

Zhao Jian, a professor at Beijing Communications University, said railway construction projects are exposed to market, technology and financing risks.

“Railway construction is mainly funded by bank loans,” Zhao said. “Some loans are directly lent to the Ministry of Railways, while others go directly to local railway bureaus.

In three or four years,” he said, “all kinds of risks will be exposed.”

Another concern is the 10 percent discount in lending rates that most banks offer their best clients. This practice reflects the price competition that heightens risks for banks, the banker said.

“Loan syndication perhaps can ease the price battle,” the banker said. “But fee charges beyond interest rates are difficult to get or keep low. In the current domestic environment, arrangement fees and agent fees are rarely paid.”

The 2007 regulation clearing the way for fees may improve the image of loan syndication among bankers. But syndicates still face an uphill battle against borrowers who refuse to pay fees, arguing that interest rates should reflect all loan costs.

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