The development of the offshore renminbi (CNH) bond market in Hong Kong – otherwise known as “dim sum” – has also seen the parallel growth of the cross-currency swap market in both deliverable and non-deliverable forwards. These swaps are a viable alternative to issuing dim sum bonds, as they can provide cheaper and more liquid funding markets, according to Omer Khan, Asia head of corporate flow rates derivatives and arbitrage financing for Deutsche Bank.
“If looking for [capital expenditure funding] in China you can obtain bank lending on a short-term basis – of two to four years,” said Khan during the Euromoney Conferences’ Global Offshore RMB Funding Forum in Hong Kong. “Primary lending rates are dictated by [the People’s Bank of China (PBoC)] and the best you can get at the moment is 90% of the three-year PBoC lending rate … so 6% is best case.”
Multinational corporations with operations in China can raise funding in their own domestic markets – usually on better terms – and then synthetically raise offshore renminbi, according to Khan.
“You can raise domestic funds [in home country], use onshore cross-currency swaps to swap into local renminbi and [that way] you can take advantage of the cross-currency swap market,” he said, noting that it has become slightly more expensive to do this but the opportunity still very much exists.
Khan noted that positive swap rates can be achieved using both deliverable and non-deliverable forwards. In the case of swapping into CNH, a rate of 2.57% over the three month or six month Euro London Interbank Offered Rate (EuroLibor) – currently at 0.61% and 0.92% respectively - can be achieved. This obviously presents significant savings over local bank funding on the Chinese mainland.
Dim sum bonds also continue to be an option for cheap financing. The lowest yield ever achieved by a multinational issuing a dim sum bond was 1.1% for Unilever, according to King Lam, a director in global risk syndicate for Deutsche Bank.
In March 2011, Unilever raised Rmb300 million (US$47.4 million) in CNH bonds from institutional investors in Hong Kong.
However Lam also acknowledged that such low yields are unlikely to be repeated, given that Deutsche’s Offshore Renminbi Bond Index Tracker (Orbit) which tracks CNH yields is pointing to yields of around 4%.
Moreover, Khan pointed out that issuing a CNH bond leaves issuers vulnerable to fluctuating investor appetite and usually requires a six to eight week roadshow. Whereas the combination of raising a loan in another currency, utilising a CNH cross-currency swap and remitting it back to the mainland is typically the fastest and most reliable, provided the domestic financing is readily available.
Despite swap options being available and attractive, Deutsche expects the combined dim sum bond and offshore certificate of deposit market to hit Rmb240 billion this year, around the same level as last year.
And in either case, remittance can still throw a spanner in the works for some companies. Remitting CNH for intercompany loans requires registration with the State Administration of Foreign Exchange (Safe). And if to be used for equity investment purposes, such remittance requires clearance from the Ministry of Commerce (MofCom) as well.
Deutsche’s clients have been able to get approvals within a two week to one month time period, according to Khan, but companies that may have remittance difficulties – if the purpose of renminbi-raising falls outside Beijing’s stipulated reasons, for example - would be wise to consider seeking a bilateral loan on the mainland.
But the opportunity to tap cheaper funding offshore may be closing, depending on how policy makers in Beijing react to the potential for economic slowdown.
“Convergence is happening between domestic lending rates and term lending through the offshore market,” said Khan. “And it will converge more if there’s pressure to reduce domestic rates due to a slowdown.”