The world’s second and third largest economies are taking steps to boost the internationalisation of the renminbi, including meeting a rising desire by Japanese companies to tap renminbi-denominated loans in their home country.
Mitsubishi Materials, Japan’s largest producer of base metals by sales, is planning its first renminbi-denominated loan in the nation to help finance operating at its new factory in China. The company could borrow the renminbi equivalent of ¥500 million-¥600 million (US$6.28 million-US$7.53 million) to complete the facility by January, according to Bloomberg, and many more companies from Japan look likely to have an interest in similar such funding.
The flow of yen-renminbi funds from Japan into China has been made possible due to the recent collaboration between both countries in May to allow direct trading of their two currencies. By avoiding the need to arbitrage the two currencies with the US dollar Japanese banks can lower transaction costs and reduce risks.
This has combined with a rising desire of Japanese corporates to invest into mainland China, which has provided them with a need to raise renminbi-denominated funding.
“Many Japanese companies are going to invest in China in renminbi and not in US dollars, which will help to reduce exchange rate risk,” said Takamoto Suzuki, a senior economist at Mizuho Research Institute to Asiamoney PLUS in a telephone interview on July 5. “Many Japanese [companies] are planning to use the Chinese currency for trade and also foreign investment.”
Lending rates offered by the Chinese lenders are much higher than those that Japanese companies enjoy in their home market. According to data from Mizuho, China’s one-year best lending rate is currently at 6.31%, compared with 3% for the one-year Hong Kong interbank renminbi reference rate.
The one-year US dollar loans stands at only 1.95%, but this level does not take into account foreign exchange risk, which “Japanese companies have the tendency to evade,” notes Suzuki.
In terms of other costs, analysts note that the swap market has become somewhat less attractive after taking into consideration recent US bank downgrades. As a result Japanese corporates have decided not to seek for funding in US dollars and swap the proceeds into renminbi.
"There are extra costs and risks that may involve with indirect funding through swaps, especially under the new Basel III rules," said Tee Choon-Hong, regional head of capital markets for North Asia at Standard Chartered (Stanchart) to Asiamoney PLUS. "A lot of banks are getting rating downgrade pressure; corporate end-users need to consider these additional costs and risks when entering swaps transaction."
As a result, experts believe that Japanese companies will increasingly be interested in obtaining locally-sourced loans denominated in the Chinese currency, either for trade or investment purposes with China.
“It signals that there is demand for renminbi financing and renminbi needs from the Japanese companies who have operations with China,” said a Hong Kong-based renminbi banking analyst to Asiamoney PLUS. “Seeing that this is a first loan for Mitsubishi Materials, it is definitely an encouraging sign that more Japanese companies will continue to tap the offshore market to obtain financing, whether in terms of bond or loans.”
Stanchart’s Tee agrees, noting that Japanese borrowers have more alternative funding instruments from which to choose, including the offshore renminbi, or CNH market.
“There has been increased interest in exploring the CNH market for funding,” he said. “The CNH market has developed quite quickly mostly in the dim sum bond but of late we have seen more transactions get done in the CNH loan sector. To the extent they [banks] are able to obtain competitive renminbi funds offshore, that’s something that everybody would consider.
“Japanese companies have invested quite a fair bit in China. There are obviously quite a few large companies that are operating there which would have some need for renminbi funds,” he added.
Japanese companies hiked investments into China by 16% over the first four months of the year compared to a year earlier, according to the Ministry of Commerce.
In April Mitsubishi Materials joins Topy Industries borrowed Rmb120 million (US$19 million) from Mizuho Corporate Bank and Bank of China’s Tokyo branch, taking advantage of relaxed regulations on offshore funding denominated in the Chinese currency that came in effect in 2010.
“Mitsubishi’s case is one of the test cases for Japanese companies, but our bank [Mizuho] has received some offers from Japanese companies. We expect this trend to grow,” declared Suzuki.