Following the Chinese Politburo’s decision to tighten thecentral bank’s monetary policy bias, the People’s Bank of Chinatoday raised the reserve requirement on the nation’s lenders. Thisis the third increase in just one month, reflecting policymakers’concerns about the extent of overheating in the Chinese economy andthe potential for rising inflationary pressures. Aside from China’slarge trade surplus, which has prompted calls for a change in theglobal currency regime, the nation’s burgeoning property marketshave also contributed to concerns of asset price bubbles in majormetropolitan areas. In response, the Chinese government has workedto limit transaction activity and the availability of credit insupport of real estate activities. Increasingly constrained intheir domestic lending activities, China’s largest lenders haveturned their attention westward, emerging as an increasinglyvisible source of credit in the United States.


The International and Commercial Bank of China’s (ICBC) Juneannouncement that it would dispatch loans of $100 million suggeststhat Chinese lenders are opting for a surprisingly visible role inUS commercial real estate credit markets. The high profile of largebalance lending on major market assets invites the potential forunwelcome scrutiny and, in the worst case, a xenophobic response inour public discourse. Balance that against a credit market thatneeds a diversity of lending sources. While they are extremelywell capitalized lenders, ICBC, along with Bank of China (BoC) andExport-Import Bank of China, are also operating in a creditenvironment that is favorable to their lending model, whereconservative underwriting prevails and many historically dominantlenders are still in the early stages of their return to commercialreal estate. Chinese banks are underwriting conservatively, andpursuing core properties with quality tenants, but they have alsooffered individual mortgages that others are currently unable – orunwilling – to extend.


Among recent deals, ICBC joined Wells Fargo in providing theCarlyle Group with a $355 million refinancing loan for theirManhattan office tower at 650 Madison Avenue. Further downtown, BoCalso recently announced that it would lend Brookfield OfficeProperties $800 million to refinance their office property at 245Park Avenue. And earlier in the year, BoC was joined by DekaBankand LandsBank Buden-Wurtenberg in providing a $475 million loan forSL Green to refinance securitized debt that backs 1515 Broadway inManhattan. All three Manhattan properties not only have primelocations, but also high-quality, long-term tenants and blue-chipowner-operators. And while these loans are a small share ofoverall originations, they are sufficiently visible that they havehelped to set benchmarks in the price discovery process.


But what if the Chinese economy slows and the rate of capitalformation also moderates? or if the credit demands of a sharpdeflation in China’s residential markets draw capital back to theMainland? Will this new source of credit wither? In fact,appropriately risk-adjusted opportunities in China’s domesticenvironment should warrant continued diversification onto theinternational stage. From a strategic standpoint, the banks havecertainly signaled that they intend to play a long-term role. Andso even if Chinese growth at home is tempered by a slowdown indomestic housing markets or a rise in the yuan, the desire foryield balanced with the need for diversification and strategicintent should support Chinese lenders’ sustained presence in worlddebt markets.

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Dr. Sam Chandan

An irreverent take on the macroeconomic environment. Dr Sam Chandan is President and Chief Economist of Chandan Economics and an adjunct professor in real estate and public policy at the Wharton School of the University of Pennsylvania.