Secured loans are a sign of confidence in Chinese businesses

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(Bloomberg) – Even as China’s regulatory crackdown arouses investor nervousness about the outlook for the corporate sector, part of the lending market signals confidence that the country’s businesses will continue to grow.

Debt transactions for which the arrangers guarantee the entire commitment before syndication are on the increase in China and Hong Kong. So-called secured loans suggest the optimism of arrangers about borrowers’ prospects, since managers will end up with more debt than they intended to hold if there are not enough creditors who subscribe to it on the primary market. They may need to sell it later for a lower price to investors.

Funding raised outside mainland China for Chinese and Hong Kong companies rose 35% to $ 9 billion in the first half of 2021 from a year earlier, the highest since the first six months of 2019, according to data compiled by Bloomberg. At least two deals have been signed so far in July, with bankers saying more are likely in the works this year.

The popularity of loans is a sign that despite the turmoil in the Chinese market as regulators crack down on the tech to real estate sectors, investors are confident the economy will continue to grow and support the real estate industry. businesses as a whole. Chinese companies posted better profits in the first half, with profit margins for companies in the Shanghai Shenzhen CSI 300 index rising to 10.1% from 9.76% in 2020.

Bankers love secured loans because offering them can help them secure money orders in a competitive market and they generally earn more fees than regular debt transactions.

But demand for them could weaken if China’s regulatory crackdown weighs on business activity. The restrictions have already led to a decrease in the use of debt by Chinese companies to pay for overseas mergers and acquisitions, with that debt on track to decline to its lowest level in seven years.

Read more: Chinese crackdown thwarts demand for loans to fund overseas mergers and acquisitions

For now, the abundance of liquidity in the loan market has kept bankers optimistic about the prospects for guaranteed loans for Chinese companies as the country’s economic recovery looks set to continue.

Signs are emerging that China wants to reassure investors about the outlook for financial markets.

Strengthening China’s economy provides a guarantee and a basis for the development of the capital market, a Xinhua official said after the crackdown on online tutoring companies fueled a stock rout. And the securities regulator called a meeting on Wednesday evening with major investment banks, including international lenders, to allay fears that the country’s recent policies targeting the education sector are hurting other industries.

Loan market liquidity has rebounded so far in 2021, according to Andrew Ashman, head of the Asia-Pacific loan syndicate at Barclays Bank PLC. He says appetite for secured loans now matches levels seen before the Covid-19 pandemic

(Add a comment from Xinhua and a meeting of China with the banks in the penultimate paragraph.)

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