Finance

Christopher Langner is a markets columnist for Bloomberg Gadfly. He previously covered corporate finance for Bloomberg News, and has written for Reuters/IFR, Forbes, the Wall Street Journal and Mergermarket.

Standard Chartered Chief Executive Officer Bill Winters can add another string to his bow since taking the helm of the London-headquartered bank last year. The lender has now become the first foreign financial institution to trade in China's interbank bond market, the third-largest in the world.

Outside of bragging rights, the beachhead allows Standard Chartered to claim it will be better suited to underwrite the debt issues of foreign companies wanting to tap China's domestic liquidity. The bank itself may even resort to such a funding avenue, having issued local debentures before.

That boast, however, may sound better than it really is. For all the promise of China's so-called panda bond market, there have been precious few takers. Also, engaging in note trading in China is almost akin to loaning money. Securities hardly ever change hands and once a bank buys them, it's pretty much for good.

Bankers won't say that directly, but the proof is in the accounts.

Fixed Assets
ICBC offers a glimpse of how much balance sheet it takes to play in China's bond market
Source: Company filings

ICBC, China's biggest lender and one of its most-active underwriters, reported that it had 132.5 billion yuan ($20.1 billion) of bonds as assets that were held for trading in its 2015 annual report. The entire amount was to meet liquidity requirements, meaning that effectively, zero is being held with a view to making a buck from trading. ICBC also reported 1.4 trillion yuan of notes that it categorizes as available for sale.

The key here is the wording. In accounting speak, financial securities classed as "available for sale" are treated differently from those that are "held for trading." It boils down to how gains, or losses, from price fluctuations in the securities are incorporated into a firm's bottom line. Whether to categorize as one or the other usually depends on two things: what a company plans to do with those assets, and how liquid they are.

Against the Tide
ICBC's profit from debt trading as a percentage of operating income was dropping when the bank made a big international push, increasing its foreign-bond holdings by 58 percent
Source: Company filings

Judging from ICBC's choice of language, the fact the vast majority, about 90 percent, of its debt securities are classed as available for sale means they aren't very liquid. "Trading" in China's bond market is, therefore, more of a balance sheet game. And it's one Standard Chartered is already losing, as rising nonperforming loans, provisions and impairments shrink its ability to grow its books.

Meanwhile at StanChart...
The bank cut its total holdings of debt securities by 2.3 percent last year as it shrinks its balance sheet
Source: Company filings

As for claiming it can underwrite onshore yuan debt, good luck. It's hard to see any offshore institution chipping away at the strongholds Bank of China, ICBC and their private-sector peers such as China Minsheng have on the local bond market. Not to mention that fees are already low, even for them.

Standard Chartered shareholders shouldn't expect to see much benefit from the lender's latest foray. Bragging rights may be all Winters gets out of it.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Christopher Langner in Singapore at clangner@bloomberg.net

To contact the editor responsible for this story:
Katrina Nicholas at knicholas2@bloomberg.net