How Dollar Short Are Chinese Banks?

A Discrete Look At What Is Bigger Than All The World’s QE’s Combined
In October 2014, Bank of China issued its first AT1 (coco) piece at a whopping $6.5 billion, more than three times subscribed with $21.8 billion in orders. Though the deal flow skewed Asian, meaning Asian demand, that only reinforces what the eurodollar actually represents. A little over a month later, Commercial Bank of China funded a large triple currency AT1 starting with a RMB 12 billion (about $2 billion equivalent) piece, $2.95 billion in eurodollars, and a final, marginal €600 million piece. According to Moody’s, the biggest issuers of cocos since 2009 have been the Swiss, including, not surprisingly, Credit Suisse #1 at $19.5 billion (not all in dollars) and UBS ($18.5 billion), and the Chinese; Bank of China ($18.9 billion very likely mostly in “dollars”) and Agricultural Bank of China ($17.8 billion).

When the coco market fell apart in early 2016, with no issuance at all for nearly the whole of the first quarter, that disrupted intended funding not just for Deutsche Bank and European firms expecting to raise that €40 billion on the year, but also the Swiss and Chinese heavily in terms of their intended “dollar” flow. I haven’t found any published expectation for what Chinese banks, in particular, were planning on funding via this market in 2016 but it is quite reasonable to assume it was significantly more than zero. Where might they have gone instead to replace those expected “dollars?”

Chinese banks were likely moved into shakier short-term “dollar” funding arrangements or to be put upon the PBOC’s rolling crisis management. From this perspective you can appreciate the Chinese central bank’s increasingly impossible tradeoff between “selling dollars” and internal RMB liquidity, and why it swings so assuredly from one to the other at these regular intervals. Unfortunately, there is very little information about cocos in the months since the Deutsche Bank-led scare of the January/February liquidations. While UBS was the first to open up the coco market back in March, there isn’t much to indicate that banks are back to sourcing “dollars”, euros, or anything else at even close to the same pace as last year’s level (which was already, again, less than 2014). In other words, just another tightening of the systemic ratchet.

Related: December, 2015 Bloomberg: The New Love for Chinese Yield Chasers: Leveraged Coco Bonds
The Chinese yuan’s declines and lower local rates have encouraged the nation’s investors to go offshore in their quest for yield. That’s fueling more interest in leveraged notes linked to contingent convertible bonds issued by Chinese banks.

“In recent months, we have seen growing interest from onshore Chinese clients in offshore U.S. dollar-denominated assets,” said Deng Xixi, head of the financial products department at Haitong International Securities Group Ltd. “A lot more Chinese clients are shifting their focus from the Chinese stock market to cross asset solutions, especially China bank preferred share products with leverage features to enhance yield.”

Chinese lenders are the biggest issuers of such capital used to meet rules for lenders to have sufficient buffers to cover losses. The convertible preferred shares are sometimes called coco bonds. Leverage features allow investors to gain more exposure to the underlying assets, or coco note in this case, than they had paid for.

...“Leverage is the theme for clients in the Greater China region and we have seen a lot of leverage requests on coco bonds,” Hong Kong-based Chan said. “The leverage can go from a bit more than one to up to three times.”
FT: Chinese banks issue most coco bonds
Faced with increasing demands from regulators for capital that can absorb losses, Chinese banks collectively issued $59bn of contingent convertible, or coco, bonds in 2014, equivalent to a third of all global volumes according to research by Moody’s.Most coco bonds sit above equity holders in a bank’s capital hierarchy, meaning they are exposed to losses before senior creditors.

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