has begun revising its 1997 syndication rules to accommodate the expected increase in the number of syndicated loans.
The central bank is expected to introduce a new version within a few months.
Insiders said the revised rules will help standardize syndicated-loan activity, a major project-financing vehicle in which a group of commercial banks work together to grant loans to borrowers who are in need of a large pool of capital.
Huang Chen, director of the investment banking department of the Industrial and Commercial Bank of China (ICBC), told Business Weekly: "One of the major readjustments the People's Bank of China will make in the new revision is to allow commercial banks to charge borrowers commission, whereas income from interest on loans is currently the only source of revenue for syndication banks."
Zhou Tianyu of ICBC's corporate banking department added that, with the approval of the central bank, his bank has charged commission up to US$2 million for the US$1.676 billion syndicated loan for a petrochemical project in the South China Sea jointly funded by Shell and the China National Offshore Oil Corporation (CNOOC).
"Charging the financiers of large projects commission is a major breakthrough for domestic commercial banks, and the central bank will formalize the charges in its revised rules," said Zhou, who has taken part in the granting of many syndicated loans in his bank.
Zhou added that other major revisions will involve regulations on syndication procedures and the applicability of Chinese legal documents to foreign banks.
Since the first transaction in 1987, many syndicated loans, especially those to finance big projects, have been mainly organized by the State Development Planning Commission and the State Economic and Trade Commission.
The new adapted rules will specify detailed procedures for syndication in which borrowers will choose the lead arrangers from the bidding banks and then the lead arrangers will organize the whole syndication, according to Zhou.
Analysts said the adapted rules, in accordance with international practice, will better standardize syndicated lending activity and guard against malpractice.
Zhou added that the new rules will also address the applicability of Chinese and overseas rules and regulations when foreign banks are included in a syndication.
Foreign banks have enhanced their presence in China's syndicated-loan market in recent deals to finance big projects. Philip Cracknell, global head of syndications at Standard Chartered, said on an earlier occasion that China's entry into the World Trade Organization and the subsequent opening of its financial sector are expected to bring about more such transactions.
The Chinese Banking Association, which was not available for immediate comments, has been gathering suggestions from domestic banks since March and it has passed on its finding to the legal department of the People's Bank of China.
Syndicated loans represent roughly 0.2 per cent of all the corporate loans granted by ICBC, compared with 40 to 60 per cent for foreign banks, according to Zhou.
Syndicated loans in South China's Guangdong Province and East China's Shanghai make up 70 to 80 per cent of the mainland market, added Zhou.
ICBC's Huang said he sees vast potential in the Chinese market and considers syndicated loans as an effective way to divert risks, especially when the credit system in China still needs to be improved so much.
Besides the project in the South China Sea, a US$1.8 billion loan for the Shanghai SECCO Petrochemical Company was agreed in January.
A loan agreement worth US$1.4 billion was struck last Monday for the integrated petrochemical site under construction in Nanjing - capital of East China's Jiangsu Province - by BASF-YPC, a 50-50 joint venture between the German firm BASF and Sinopec.
It is reported that the British oil giant BP, a joint sponsor of the Shanghai SECCO project, triggered a price war among Chinese banks over the syndication, which pushed the interest rate on the loan sharply down.
(Business Weekly August 13, 2002)
