Despite recent steps to improve offshore liquidity and create a formal base rate for interbank lending, few borrowers are interested in borrowing in an appreciating currency.
Source: Reuters/Bobby Yip
A woman walks past a foreign exchange store displaying a sign that it accepts the exchange of the renminbi in Hong Kong.
Syndicated offshore renminbi, or Dim Sum, loans have reached just US$354m so far in 2013, showing that growth in the new market remains painfully slow.
The Dim Sum loan market has been operating since late 2010, but its development has been far slower than that of the offshore renminbi bond market. Limited offshore renminbi liquidity, an inactive interbank market and the absence of a common base rate have held back growth, while bankers now say that Chinese companies are preferring US dollar loans to profit from a favourable exchange rate.
Only US$822m of Dim Sum loans were completed in 2012, according to Thomson Reuters LPC data, compared to Rmb150bn (US$24.5bn) of Dim Sum bonds.
A sudden acceleration looks unlikely, as expectations of the renminbi’s continued appreciation against the greenback are allowing Chinese companies with renminbi revenues to profit by borrowing in US dollars.
“When revenues are in renminbi and the foreseeable trend in the renminbi rate is increasing against the dollar, it is cheaper to borrow in dollars. When borrowers use their renminbi revenues to repay dollar debts, they benefit from the attractive exchange rates against the dollar,” one source said.
The renminbi’s strong, albeit volatile appreciation against the dollar started in 2005, but has accelerated again in recent months. The currency’s spot exchange rate against the US dollar pushed close to its strongest allowable level at 6.1476 on May 15.
China Automation Group opened the Dim Sum loan market in late 2010 when it included a renminbi tranche in a US$50m 3.5-year term facility. Subsequent loans were also structured as small tranches of bigger deals.
Only a handful of single-currency Dim Sum loans have been issued to date and these include a Rmb1.8bn two-year deal for state-owned Sinotruk (Hong Kong) and a Rmb600m three-year revolving credit for Taiwanese-owned food and beverage company Uni-President China Holdings in mid-2012. The largest Dim Sum loan of 2013 so far is a Rmb1bn two-year facility for Sichuan Expressway.
Liquidity continues to constrain the market because, bar the biggest Asian lenders, Chinese banks and some Japanese banks, relatively few financial institutions have enough offshore renminbi deposits to consider term loans.
Chinese companies also have little incentive to borrow in renminbi as US dollar loans are plentiful in the Hong Kong market. US dollar loan volume in Hong Kong has reached US$8.9bn this year, compared to just US$213m-equivalent of renminbi loans.
More Dim Sum loans are expected, however, when the renminbi is less volatile or when the exchange rate against the dollar is on a more predictable trend. In the meantime, lenders remain concerned about volatility complicating repayments.
“Many borrowers are concerned about the fluctuation of offshore renminbi when the repayment source is not a natural hedge against the currency borrowed,” a loans banker said.
Future development
The plan of the Hong Kong Monetary Authority to launch an interbank offered rate for the offshore renminbi, or CNH, market in June promises to boost the development of the fledgling Dim Sum loan market.
Loan bankers welcomed the new rate, which will offer an alternative to individual banks’ lending rates, as an important step forward and a positive development.
“This is definitely good news,” said Phil Lipton, managing director of syndicated finance at HSBC, which led Dim Sum loans for Uni-President and Sichuan Expressway. “A broadly based reference rate will make borrowers and lending banks more comfortable in using this currency for financing.”
Lipton said the fixing could be a catalyst for further growth but, even with a common base rate, the Dim Sum loan market would still need greater demand from borrowers if it was to become a full-fledged market.
Bankers hope that CNH Hibor will develop into a rate as recognised as Libor. Hong Kong’s Treasury Markets Association currently publishes individual CNH Hibor rates of 13 banks on its website. Since the association started compiling data more than a year ago, bank’s rates have narrowed to a relatively small range, with all quoting 2.4%–2.6% for three months, 2.6%–2.7% for six months, and 2.8%–3.0% for 12 months.
Dim Sum loans previously used the average of some bank’s individual rates as a common base rate, but new Dim Sum loans are expected to use the HKMA’s new CNH Hibor rate when it comes into effect in June.
As well as the new CNH Hibor fixing, the HKMA will also eliminate a net-open-position rule and a 25% liquidity requirement, which will give CNH the same status as other currencies when banks’ statutory liquidity ratios are calculated.
That means banks will be able to treat CNH deposits in the same way as any other currency, rather than having to hoard additional reserves in cash, and is expected to release more renminbi into the interbank system and, as a result, boost liquidity.
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