Deutsche Bank and BNP Paribas have become the first foreign banks to gain Beijing’s approval to lead underwriting for all kinds of onshore debt in China — the latest high-profile reform this year aimed at opening the financial sector of the world’s second-largest economy.
China’s National Association of Financial Market Institutional Investors, which regulates the interbank bond market, said in an announcement dated Monday that the two banks had been granted type-A licences, allowing them to underwrite all varieties of renminbi-denominated debt for both local and foreign companies.
The licences grant greater access to China’s Rmb93tn ($12.9tn) domestic bond market, the latest move by Beijing to counteract a trade war with the US and concerns locally over hidden risks in the Chinese banking system.
Previously, BNP, HSBC and Standard Chartered had been granted type-B licences, which permit lead underwriting for offshore renminbi issuance, known as panda bonds. Deutsche Bank, Citigroup and JPMorgan, meanwhile, had underwriter licences allowing them to participate but not lead on domestic deals.
Foreign institutions have long been confined to the panda bond market, which still encompasses only a sliver of the debt issued by Chinese entities. While last year’s panda bond issuance of $5.8bn was a record high, it was less than 1 per cent of the $843bn issued onshore, according to data from Dealogic.
Reforms further opening China’s financial sector have come steadily this year. In January, S&P became the first and only global rating agency to win a licence to operate in China, and it awarded its first local rating in July. In August, JPMorgan’s asset management arm won an auction to purchase a majority stake in its Chinese joint venture, making it the first foreign business to take control of a local asset management JV.
Chang Geng Lai, chief executive of BNP’s China arm, said the licence was “recognition of our work to develop and deepen foreign expertise in Chinese capital markets”.
Haitham Ghattas, head of Asia-Pacific capital markets at Deutsche Bank, said the licence would allow the bank to expand its underwriting for Chinese companies.
“Many of the borrowers that we already work with for offshore bond issuances are Chinese. This will enable us to work with them domestically onshore,” he said.
However, Deutsche and BNP could find it challenging to turn a meaningful profit from underwriting in China, where local underwriters typically offer cut-rate fees to establish a broader relationship with issuers that can lead to other, more profitable business.
Edmund Goh, Asian fixed income investment director at Aberdeen Standard, said underwriting in China alone was unlikely to be an important segment for either bank’s debt capital markets business.
“I can’t see it being a big profit-generating business for these banks on its own, but it will probably raise the profile of these banks in the eyes of Beijing and open other opportunities for them to run different businesses in China,” Mr Goh said.