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In its most recent regulatory filing late last year, Focus Media, a Chinese advertising company listed in New York, disclosed details of the financing that will facilitate a deal to take it private.
The $3.1bn transaction is the largest-ever buyout in China, according to Dealogic. The buyers – alongside the chairman of the company – include three private equity houses, Carlyle, Citic Capital and FountainVest, a local group founded by Frank Tang, a former Goldman Sachs and Temasek executive.
The largest portion of the $1.5bn in debt financing, meanwhile, comes from China Development Bank and China Minsheng Bank – a policy bank and a second-tier but relatively commercial bank respectively. Traditionally such leveraged lending has not been associated with either category.
But the long-term growth rate is slowing in China. Even Beijing is concluding that whatever growth there is can no longer come from debt-driven investment in infrastructure and other areas, and must come instead from domestic consumption. So banks in China will have to seek out new opportunities.
The challenge is not unique to China. Banks have long been considered a proxy for growth in their home markets. This year is likely to be challenging for many banks in Asia as growth slows across the region. The bearish case was outlined in a recent Morgan Stanley report, which noted that as deficits grow, on the current account side or the fiscal side, the quality of the Chinese banks’ balance sheets will deteriorate; it added that their deposit growth and liquidity will also suffer.
That in turn leaves less capital as a cushion and puts upward pressure on interest rates. Exports have been dropping, demographic trends are turning more negative and productivity growth is lagging. Current account surpluses, which were more than 7 per cent of gross domestic product in 2007, are likely to be about 2 per cent for 2012.
In the past China has always managed to grow out of its problems and its banks have been able to increase their good assets to keep the proportion of bad loans small. But now that the economy is slowing, the excessive credit growth of recent years may prove problematic. Bank of China, for example, grew its loan book 49 per cent in 2009 alone, according to data from Morgan Stanley. Is it really possible to swell lending at that rate and not have problems? Moreover, there is concern about areas where the shadow banking system meets the official banking system, particularly in the form of wealth management products from trust companies that banks have been marketing with higher rates than deposits. These bring new potential contingent liabilities that increase risks in the banking sector.
In Japan, the banks are even more vulnerable. If Shinzo Abe, the country’s new prime minister, succeeds in finally generating inflation, interest rates will go up and the banks will face huge losses on their government bond portfolios – holdings that amount to nine times their capital, according to an estimate from JPMorgan’s private bank. So far corporate loans haven’t been a concern because Japanese interest rates are so low that servicing debt has been easy. But last year, corporate distress started to move up the chain from commoditised companies lacking a real competitive edge, such as the chipmaker Elpida Memory, to those with serious technology of their own such as electronics group Sharp. Whole sectors are in trouble, such as shipping. Japan’s banks are doubly exposed, by both lending to clients and holding their shares.
The story in India isn’t much brighter. Because of India’s fiscal deficit, widening current account deficit and weak currency, the country has to import capital, which is ever more costly. Standard & Poor’s is looking at downgrading the country, possibly to junk status. The loan to deposit ratio at all Indian banks adjusted for restructured assets is already more than 100 per cent. Some public sector banks have dangerously large exposures to struggling infrastructure projects.
Finally, in many cases, shadow banks have come in and picked off the highest-return parts of the lending business. While Asian banks have filled part of the gap left by the Europeans pulling back, they have been in the most senior part of the capital structure, where risks are lowest and margins thinnest. Meanwhile, the lower, more junior debt, where margins are fat but there is a scarcity of capital providers, has seen an influx of hedge funds, gleefully noting that because rates have come down for their own financing, they can afford to pay far more for the riskier stuff.
Their borrowers will continue to bow low to bankers. But shareholders may not.
Henny Sender is the Financial Times’ chief international finance correspondent
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