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Plunging China trade loans test Singapore banks

[SINGAPORE] Singapore banks, which have enlarged their China credit exposure in recent years, were hit by a drop in billions of dollars of China trade financing deals as mainland borrowing conditions became easier while offshore interest rates grew more expensive.

The premium of the onshore six-month Shanghai interbank offered rate to the offshore six-month CNH Hong Kong interbank offered rate shrank to 0.3 per cent as of the end of March, from as wide as 2.3 per cent in the first half of 2014. That's the smallest premium since the offshore yuan interest rate benchmark was launched in 2013, and makes offshore lenders a less attractive option for mainland borrowers.

Singapore's DBS Group, Southeast Asia's biggest bank, reported a S$7 billion decline in first-quarter trade loans from the previous quarter. Half of its S$55 billion trade book was accounted by Chinese companies and banks, and the bulk of the quarterly decline was caused by China, DBS data shows. Oversea-Chinese Banking Corp posted a S$1.9 billion quarter-on-quarter drop in trade loans, with the majority of the drop linked to China. United Overseas Bank, which has the least exposure to Greater China compared to its domestic rivals, has not released data on its China-related trade loans, although its overall Greater China lending fell on quarter.

The offshore-onshore interest rate gap will remain narrow as Chinese policymakers keep credit conditions easy to stimulate Asia's largest economy while offshore yuan liquidity tightens further after Beijing recently approved new channels for investors to move yuan funds back to the mainland. The outlook for China trade loans is also weighed down by the country's slowing economy and weak commodity trade.

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For Singapore banks, the slowdown will drag on loan growth this year, which most analysts expect will be in the mid-single digit range versus a double-digit pace last year. "We will see less growth in China trade finance, which was a good deal from a risk-reward perspective," said Eugene Tarzimanov, senior credit officer at Moody's Investors Service in Singapore. "These deals weren't very risky for the Singapore banks because of the type of clients (Chinese SOEs mostly), credit protection offered by top Chinese banks and short-term maturity of less than six months."