E-Land Fashion China Holdings signed a Rmb1445m loan as part of a HK$333m facility last month (February 27). The small deal would probably have gone unremarked if it was not for the fact it was only the fourth offshore renminbi (CNH) loan since rules were relaxed to allowing financing in the currency.
There is plenty of interest in offshore renminbi loans but dealers are struggling to get facilities completed because of the lack of a pricing benchmark.
"There’s a Chinese saying which says talk does not cook rice and there has been a lot of talk, said an Asia Pacific head of syndication. "A loan needs a benchmark that is deep and wide and very respected and has proved itself through different market situations. And we are no where close to having a similar benchmark to Libor."
Earlier this year the first steps were made towards providing some sort of pricing benchmark when the Treasury Market Association (TMA) starting publishing the offshore renminbi (CNH) HIBOR fixing rates of HSBC, Standard Chartered, and Bank of China (Hong Kong) on January 3.
However this is seen as more a symbolic step than a practical one.
"The TMA is publishing rates but people are not using that it as it may not represent the cost of funding renminbi at their banks," said Wilson Wan, the head of leveraged and structured finance at BOCI speaking at the CFA Institute Asia Pacific Investment Conference on March 7. "Banks are not sure whether they can fund their positions at certain rates."
One issue is the number of banks which are taking part. Libor which is set by members of the British Bankers Association, has between seven to 18 banks providing rates depending on the currency.
The offshore renminbi market also suffers from liquidity issues.
"There is a lack of liquidity in the interbank market so there’s no push to have a benchmark," says Phil Lipton, head of syndicated finance at HSBC.
As a result of the lack of confidence most deals are done on the bilateral basis – between one dealer and one borrower – but this comes with added risk for banking clients.
"Clients are taking a big risk [with bilateral deals] if the bank was tight on CNH liquidity, unilaterally they could change their rates and there would be unable to do anything about it," said the head syndication.
Even if the CNH market has a fully functioning benchmark, loans dealers would still need to overcome reluctance on the part of borrowers. The appreciation of the renminbi remains as issue - despite the ability to hedge – as borrowers are concerned about how much the currency gain will increase the amount they have to pay back. A renminbi loan also does not necessary offer the incentive of cost benefits.
"It (CNH) can be hedged but there is a cost involved. For a lot of borrowers it is more natural for them to borrow in Hong Kong dollars or US dollars. If you borrow in renminbi is there going to be cost saving? Not really," says HSBC’s Lipton.
Loan dealers admit they have been disappointed at the slow development of CNH loans, especially as the dim sum bond market has seen such a strong take up. There was an assumption that loans would experience a similar demand. The difference is dramatic. There have only been four renminbi loans totalling Rmb487 million (US$77 million) since the rules were relaxed in 2010, according to data provider Dealogic (see chart). By contrast in the year to March 8, volumes in the offshore renminbi bond market have grown to almost US$2 billion equivalent.
Offshore RMB Loans Transactions on record