Settlement of Bond Issue Clears Way : China Again Borrowing Money in U.S. After 38 Years

China is starting to borrow money in the United States for the first time since the communists seized power in 1949, Western and Japanese bankers told Reuters.

IBJ Schroder Bank & Trust of New York, a unit of the Industrial Bank of Japan, has recently arranged syndication of a five-year, $150-million loan at very low interest to the state-owned Bank of China.

Paving the way for the loan was the U.S. Supreme Court’s removal of a key stumbling block to Chinese financial dealings in the United States with its dismissal in March of claims by American holders of pre-1949 Chinese bonds disavowed by the Beijing government.

The defaulted railway bonds were issued in 1911 by the ruling Qing dynasty, which the Chinese government does not acknowledge. The pending lawsuits had kept Beijing from tapping the U.S. capital market. “This threat has now been removed,” one banker said.

A North American banker said that although two other bond cases are still before the courts, the banking community and China has accepted the Supreme Court decision as a definitive precedent.

Kazuhiko Iida, IBJ’s assistant Beijing representative, said his bank did not fear litigation against the loan by holders of pre-1911 bonds.

But while the controversy over the defaulted dynastic bonds was dying down, another erupted. American banks with offices in China, all keen to lend to Beijing, were unhappy that Beijing should have chosen to make its first move in the U.S. market with the subsidiary of a foreign bank.

“China never approached us. We learned about the deal from the newspapers,” one American banker said.

Banking analysts said China was getting the money very cheaply, at the same rates the banks themselves would pay.

A European banker said European and North American banks found it hard to compete with those from Japan, which could offer extremely low interest rates. “Banks are still willing to make ‘friendship deals’ to get into the China market,” he said.

He said that under the terms of the new loan, China could choose to pay the lower of two rates. It could pay either the London Interbank Offered Rate (LIBOR), the rate for large short-term loans between banks, or 0.24 percentage point above the interest on three-month certificates of deposit.

A Japanese banker said Japanese banks were able to offer low rates because they were flush with money and less exposed to bad debts to South America. “You cannot criticize us for bad loans made by U.S. and European banks,” he said.

Iida said the rates China had to pay would rise as its debt increased. “Its borrowing requirements are so large; there are so many projects. The rates must go up.”

The European banker said China had no strategy in managing its foreign debt, officially put at $16 billion at the end of 1986, but simply went shopping for the best deal.

His bank had urged China to borrow eurodollars at a fixed rate when interest rates were falling because most of its foreign trade was in dollars.

“But it did not, and now rates are rising. It missed an excellent opportunity.”

He said the Bank of China borrows heavily on the short-term market to ensure that foreign exchange reserves stay above $10 billion.

China Daily said last week that Beijing lacked a highly centralized and authoritative national institution to handle unified planning and coordination of foreign debt.

It said that about half of the foreign debt in the 1981-85 period was in yen, and because of the rise in the yen and the fall of the yuan, debt service liability had almost doubled.

The newspaper said China must eliminate the practice of providing loans merely at the whim of certain officials.

Iida said China was in a different category from countries such as Brazil and Mexico: “It is in control of its debt.”