Win-Win Cooperation for a New Model of Syndicated Loans ICBC and CCB Signed the Cooperation Agreement over Syndicated Loans.

May 10,2005---Industrial and Commercial Bank of China (ICBC) and China Construction Bank (CCB) held a ceremony for signing the Cooperation Agreement over Syndicated Loans in Beijing. The signing ceremony indicated the born of a brand-new model of large-amount loans in domestic banks. It reported, this is the first time for China’s major state-owned commercial banks to join hands to sign this kind of an agreement and cooperate in this field among all domestic banks.

China Banking Regulatory Committee Chairman Assistant Che Yingxin, Deputy Director Su Baoxiang, President of ICBC Jiang Jianqing and Chairman of CCB Guo Shuqing attended this signing ceremony. Deputy President of ICBC Yang Kaisheng and President of CCB Chang Zhenming signed the cooperation agreement, and Deputy Chairman of the Bankers Association of the Republic of China Liu Zhangjun hosted this ceremony.

In accordance with the cooperation agreement, ICBC and CCB forms a banking group to make syndicated loans to the same borrower that meets the agreement requirement. ICBC and CCB will grant the syndicated loan or recommend it to the market in the light of business needs, and will strengthen cooperation between two sides in terms of group preparation work, position arrangement, share distribution and cost allocation through business collaboration, information share and communication to encourage orderly competition and maintain the financial market order hand in hand, so that a sound market environment for the growth of China’s syndicated loans can be produced.

In a syndicated loan, one or several banks that are authorized to make loans serve as the lead bank(s), and a number of banks and non-bank financial institutions join them in forming a banking group; they sign the same agreement with the borrower and provide financing for the borrower on the same terms. It is a form widely accepted in the international market.

This cooperation over syndicated loans between ICBC and CCB is a farsighted strategic step, based on the development trend of international banking loans and the status quo of the domestic credit market. It is a bold try on the management model transformation and profit growth mode during the shareholding restructuring program. The two banks said, they hoped that this kind of cooperation can make multilateral loans widely adopted in the international market a major mode of large-amount loans, and can push forward the domestic syndicated loans development. Both sides also pointed out that they will explore a scientific and efficient cooperation mechanism over syndicated loans and sincerely welcome other banks to join this cooperation, so that the cooperation scope and its influence can be widened and expanded. In this way, a sound financial order and environment can be created and established through the joint efforts of all domestic banks.

By the end of 2004, the RMB and foreign currency loan balance of domestic financial institutions had reached RMB 18.9 trillion, 95% of which was bilateral loans. That is to say, when the bank granted loans to the borrower, the bank, by itself, negotiated and signed a one-to-one loan agreement with the individual borrower. By using bilateral loan mode, banks can maintain independence and flexibility, but China’s credit environment and enterprise’s information release mechanism is yet to be improved, and several banks might grant a credit to the same borrower at the same time if banks just make loans in a bilateral manner without information share. And the borrower can use this asymmetric information and lack of communications among banks to receive credit overrunning its solvency margin. In this way, banks may reduce loan interest rate, extend the loan term, and decrease the guaranty threshold to compete with their counterparts. It will fail to establish a rational competitive environment in the credit market and will increase banks operational risks.

In comparison with the traditional bilateral loan, the syndicated loan has a great significance in addressing the shortfall of bilateral loans. By means of syndicated loans, banks can exam the borrower respectively and then communicate with each other over the borrower’s status to make the final decision. Thus, banks can establish a multilateral mechanism of examining, balancing and monitoring to overcome the shortcoming of asymmetric information, identify and disperse credit risks. All institutions joining the banking group shall reach a common ground in terms of interest rate, term and other requirements to prevent the unfair competition. Syndicated loans can also reflect the overall state of borrowers capital needs and banks supply and help establish the market-oriented loan interest rate mechanism. As to borrowers, they need not to negotiate with every bank time after time and can reduce the financing time and decrease the financing cost.