|Shanghai Free-Trade Zone Rule Change to Boost Offshore Yuan Loans|
Hong Kong's offshore yuan loan business has been lagging behind the growth of other offshore yuan products, but bankers are optimistic this will change following new policies announced by Beijing in the pilot Shanghai free-trade zone and given the continued weakness of the currency.
Last month China's central bank announced details on the use of free trade accounts in the Shanghai free-trade zone. Under the new rules, firms registered in the zone would be able to borrow yuan from offshore banks and use the proceeds to repay existing loans borrowed from Shanghai financial institutions which have a tenor of no less than six months.
DBS economist Nathan Chow is optimistic about the new rules. "The changes underscore Beijing's commitment to accelerate the pace of capital account liberalisation," he said. "Previously, mainland firms had difficulties channelling yuan funds back to China due to tight capital account controls. "A more effective access to the offshore market under the new rules should significantly raise the demand for offshore yuan loans."
A banker who requested anonymity said: "Many banks are still in a preparation stage for this new move and it is still unclear how much demand there would be. There are not so many entities in the zone yet and there is no exact data on how much they have borrowed from Shanghai-based lenders and how urgent they would need to refinance."
The banker added that it was "definitely a good start" in order to get the ball rolling on offshore yuan business. Another aspect of the new rule is that the amount of offshore yuan an entity registered in the zone can borrow from offshore banks cannot exceed its paid-up capital and the loan proceeds can only be used in the zone, according to another banker who declined to be named.
Although the borrowing cost of yuan in Hong Kong is around 4 per cent, which is much less than the onshore borrowing rate of 6 per cent, corporate borrowers have been avoiding this market over the past few years. Instead, they are choosing to raise funds in the offshore bond market by issuing yuan-denominated bonds, or so-called dim sum bonds, which cost around 4 to 4.5 per cent on average.
According to HSBC analyst Crystal Zhao, the one-way appreciation of the currency has restricted the interest in offshore loan products as investors would have to repay more for the yuan's appreciation when the loans are due. Another reason is the flexibility. Dim sum bonds usually require less documentation and have a deeper pool which could provide more immediate sourcing of yuan to the borrowers, especially when corporations want to borrow for capital expenditure expansion.
The current outstanding yuan loans of Hong Kong banks totalled 123 billion yuan (HK$155 billion), about one-sixth of the 704 billion yuan dim sum market, according to DBS economist Chow. The yuan's loan-to-deposit ratio in Hong Kong was just 13 per cent, well below the 74 per cent average for all currencies. Assuming that the yuan's loan-to-deposit ratio closes the gap with other currencies, outstanding yuan loans could reach 710 billion yuan, Chow said.
The opinions expressed do not constitute investment advice and specialist advice should be sought about your specific circumstances.
Published on our website on June 26, 2014