The profile of Chinese financial institutions in Africa is changing as banks look to take greater risk and capitalise on growing Sino-Africa trade. But will their mounting interest crowd out the domestic banks? Shannon Manders reports.
China-Africa trade continues to grow at a dramatic pace, and banks on both sides of the corridor are persisting with propositions to woo this client base.
Trade between China and Africa grew 15-fold in the last decade to reach US$166bn in 2011, and is expected to have reached US$200bn at the end of 2012.
Despite the financial crises taking place elsewhere in the world, the Chinese banks have not shown any sign of retreat from the African markets.
“Instead, they have increased their activities on the African continent, and it is likely the trend will continue – along with Chinese companies’ trade and investment with the continent,” says Windsor Chan, deputy general manager of China Construction Bank’s (CCB) Johannesburg branch.
Chinese institutions have long been criticised for their initial activity in Africa; securing access to raw materials is the Asian country’s number one interest, and its efforts in doing so have often been construed as being government-linked.
“There is a perception in the market that the Chinese banks are only on the continent for the benefit of China,” says one African trade financier.
But now, whether as a result of the realisation of this observation, or a change in policy, Chinese financial institutions appear to be attempting to improve their profile in Africa.
“They’re saying: ‘We’re here to bank, not just to back Chinese deals.’ It may be a bit of PR, but it’s a move in the right directions,” says GTR’s source.
Craig Polkinghorne, Standard Bank’s global head and director of structured trade and commodity finance, notes that the bank is seeing a heightened awareness and interest in Africa transactions from all Chinese banks, and that they are aware of taking a different approach “whereby both China and Africa win at the end of the day”.
Whereas in the past Chinese banks may only have been dedicated to financing deals with an export link back to China, many African banks, such as Rand Merchant Bank (RMB), have noticed an interest from Chinese banks in syndicated loans where the goods are not ultimately China-bound.
“We saw this for the first time in 2012, so that’s quite an interesting move,” says Greg Havermahl, RMB’s head of trade and working capital solutions.
“For example, we’re now doing business with a mine that exports the majority of its products to India, and there’s a Chinese bank that’s committed to participate in the deal,” he explains.
Chan at CCB Johannesburg branch agrees that while it is preferable for Chinese banks to involve themselves in African transactions that have Chinese links, it is not a specific requirement.
Moreover, as the profile of Chinese banks continues to improve, and China’s importance in the global economy grows, African banks are seeing an increased number of requests from clients to bring Chinese banks in as part of their syndicates.
“This had never been a request in the past; now we’ve got two clients who have asked us to try and get a Chinese bank in on a syndicate. One is a large Swiss-based global trader, and the other is a large African trader,” says Havermahl.
What’s more, Havermahl’s view is that South African businesses are more at ease dealing with Chinese companies now than they were five years ago.
“Exporters are becoming increasingly comfortable with Chinese offtakers,” he says.
Although Chinese banks may have traditionally lagged behind other foreign banks in Africa in terms of their on-the-ground presence, they’ve recently begun to draw nearer.
Jean-Louis Ekra, chairman and president of Afreximbank, told a press conference in mid 2012 that he expects more Chinese banks to take a share of African financial institutions. “We believe that it would be beneficial for both if that co-operation could be further expanded to other financial institutions,” he said.
While Chinese banks have enjoyed using South Africa as a springboard into Africa – and as such have been cautious in their approach to banking the continent, they are now looking to set up offices further north.
In December 2012, Bank of China, which already has branches in Johannesburg and Zambia, entered the East African market by partnering with Uganda’s DFCU Bank in a bid to improve trade between Uganda and China.
The partnership will facilitate access to trade finance facilities for Chinese businesses in Uganda, offer investment advisory services and ensure co-financing of viable investment projects in Uganda.
Increasing footprints and co-operation agreements aside, Chinese banks are also looking to risk participation on African deals on their own accord – without the involvement of their African partners.
In 2012, Industrial and Commercial Bank of China (ICBC) was one of 15 international banks involved in the annual Ghana Cocobod pre-export facility, and has been involved in the Angolan Sonangol syndication without the intervention of any of the African banks.
“We’re looking at one or two things with them at the moment,” says Standard Bank’s Polkinghorne.
He adds that the South African bank has a “good relationship” with the Chinese institution, which purchased a 20% stake in the banking group in 2000.
“They are interested and are often able to assist through the provision of funding and/or providing guidance as to which Chinese entities might be interested in participating in the transaction,” he explains.
The Johannesburg branch of CCB is another institution looking to increase its activities in the African commodities and structured trade finance market. According to Chan, the CCB Johannesburg branch is the lead bank on a “significant regional trade facility” for commodities trader Metmar South Africa, and is the arranger of a syndication for Trafigura’s African business, which involves risk participation from banks in South Africa, Africa and Europe.
Impact on domestic banks
For now, South African banks are pleased with the increased interest from Chinese financial institutions.
“At the moment it’s very positive for us; we have new partners to syndicate and we have appetite for African commodity-backed finance arrangements,” says RMB’s Havermahl.
Yet, he remains cautious with a wait-and-see approach.
“For now they seem quite happy just to participate in our deals, but in time they’ll start arranging their own facilities,” he forecasts.
Rating downgrades put banks on edge
Moody’s Investor Services downgraded South Africa’s sovereign credit rating from A3 to Baa1 with a negative outlook in late September 2012. According to the rating agency, the decision reflected South Africa’s downward spiralling investment climate as a result of strikes in the mining sector, coupled with the government’s “diminished capacity” to handle its political and economic challenges.
These rating actions then prompted Moody’s to downgrade five of the country’s banks’ foreign deposit ratings the following week.
Standard Bank, Absa, FirstRand Bank, Nedbank and Investec Bank – South Africa’s largest banks – now carry negative outlooks on their local currency deposit and debt ratings, in line with the sovereign rating outlook.
Moody’s said at the time that there is little likelihood of an upwards rating momentum over the next 12 months.
Belgian export credit agency ONDD wrote in its October risk outlook that the mining unrest in South Africa is expected to “affect the growth prospects and damage the investor sentiment”.
Although the effect on investors’ appetite for assets has not yet been quantified, South African trade financiers are convinced that the knock-on effect will only trickle down to impact trade in the long term, if at all.
Greg Havermahl, head of trade and working capital solutions at RMB explains that with South African rand funding, domestic banks will have little cause for concern as they are currently match or over-funded. However, when it comes to dollar funding, South African banks’ competitiveness may be at risk.
“I don’t think it’ll affect our liquidity, it’ll simply be a matter of at what price,” he says.
Craig Polkinghorne, global head and director of structured trade and commodity finance at Standard Bank adds: “The downgrade will increase the cost at which we raise capital. For the domestic banks, the cost of borrowing will increase, and that again will raise the price at which we can lend, and will affect how competitive we are vis-à-vis international banks which aren’t affected by the downgrade.”
For now, business confidence in South Africa is low off the back of the country’s political environment, the lack of confidence in the economy, and the need for a proper growth plan.
“Corporates are biding their time and waiting to see which direction the economy is going to take before they take any action. Strikes resulted in a loss of production, plus stockpiles are building up, which reduces the need for financing. I would expect the start of this year to be a quiet period for corporate South Africa.”
How to woo the sought-after Chinese firms
Birju Sanghrajka, regional head of transaction banking product management Africa at Standard Chartered tells GTR how banks are seeking to take advantage of increased China-Africa trade:
Setting up China inbound desks: creating dedicated teams on both ends of the corridor to originate transactions and advise clients.
Focus on end-to-end service delivery: African banks are looking to optimise processes and service management to try and provide seamless delivery to their Chinese clients.
Working capital propositions: Banks are getting innovative around using project cashflows to allow for credit being extended locally.
Supply chain financing solutions: Banks are approaching Chinese project sponsors with one-stop financing solutions for both the sponsor and the sub-contractors – effectively financing the whole supply chain using risk-mitigated structures.