Chinese Lenders Support Improving Credit in Top US Markets

Following the Chinese Politburo’s decision to tighten the central bank’s monetary policy bias, the People’s Bank of China today raised the reserve requirement on the nation’s lenders. This is the third increase in just one month, reflecting policymakers’ concerns about the extent of overheating in the Chinese economy and the potential for rising inflationary pressures. Aside from China’s large trade surplus, which has prompted calls for a change in the global currency regime, the nation’s burgeoning property markets have also contributed to concerns of asset price bubbles in major metropolitan areas. In response, the Chinese government has worked to limit transaction activity and the availability of credit in support of real estate activities. Increasingly constrained in their domestic lending activities, China’s largest lenders have turned their attention westward, emerging as an increasingly visible source of credit in the United States.

The International and Commercial Bank of China’s (ICBC) June announcement that it would dispatch loans of $100 million suggests that Chinese lenders are opting for a surprisingly visible role in US commercial real estate credit markets. The high profile of large balance lending on major market assets invites the potential for unwelcome scrutiny and, in the worst case, a xenophobic response in our public discourse. Balance that against a credit market that needs a diversity of lending sources. While they are extremely well capitalized lenders, ICBC, along with Bank of China (BoC) and Export-Import Bank of China, are also operating in a credit environment that is favorable to their lending model, where conservative underwriting prevails and many historically dominant lenders are still in the early stages of their return to commercial real estate. Chinese banks are underwriting conservatively, and pursuing core properties with quality tenants, but they have also offered individual mortgages that others are currently unable – or unwilling – to extend.

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

But what if the Chinese economy slows and the rate of capital formation also moderates? or if the credit demands of a sharp deflation in China’s residential markets draw capital back to the Mainland? Will this new source of credit wither? In fact, appropriately risk-adjusted opportunities in China’s domestic environment should warrant continued diversification onto the international stage. From a strategic standpoint, the banks have certainly signaled that they intend to play a long-term role. And so even if Chinese growth at home is tempered by a slowdown in domestic housing markets or a rise in the yuan, the desire for yield balanced with the need for diversification and strategic intent should support Chinese lenders’ sustained presence in world debt markets.