Citigroup Sees Dim Sum Loans Topping $16 Billion: China Credit
The one-year yuan interbank deposit rate in Hong Kong was 2.42 percent today from as high as 3.20 percent in January after the Hong Kong Monetary Authority allowed banks to better utilize their Chinese currency deposits. Comparable Hong Kong dollar and yuan rates in China are 0.81 percent and 3.44 percent respectively. Outstanding yuan loans in the city almost tripled to 86 billion yuan as at the end of February from 31 billion yuan at the end of 2011, HKMA data show.
The HKMA changes “will leave banks more liquidity to lend out in the interbank market,” said Tan Shiming, Citigroup’s Hong Kong-based global yuan product manager for Asia. Borrowers will be companies with “real yuan funding needs who have the flexibility to leverage their trade activities or pledge their onshore assets to obtain low-cost offshore financing,” he said.
The biggest banks in Hong Kong, including HSBC Holdings Plc and Standard Chartered Plc, are counting on offering low-cost financing in the city for expansion. The growth of disposable yuan in Hong Kong, where deposits in the currency reached a record 668 billion yuan in March, will also help spur demand for Dim Sum bonds that have rallied for the past seven months, Deutsche Bank AG predicts.
The HKMA on April 25 scrapped a limit on lenders’ net open positions for yuan as well as a requirement they keep a certain amount of liquid assets in the currency. It also said that at least 15 banks will start contributing to an interbank interest rate fixing for offshore yuan, which will be compiled by the Hong Kong Treasury Markets Association from June. Daily volume of interbank lending in the currency was about 8 billion yuan, the association said last week.
“Having an offshore yuan Hibor rate will make funding costs and credit spreads much more transparent,” Citigroup’s Tan said.
Hong Kong introduced a net open position limit on yuan capital in December 2010 as a tool to manage banks’ foreign- exchange risk. The so-called NOP limit refers to the difference between banks’ yuan assets and yuan liabilities on their balance sheets. Prior to last week’s changes, local lenders had also been required to hold yuan assets in either cash, offshore sovereign yuan bonds or debt in China’s interbank market, at a ratio of at least 25 percent of their customer’s yuan deposits.
Relaxed capital rules will increase the availability of yuan in Hong Kong, sending Dim Sum bond yields lower, according to Beng Hong Lee, the Shanghai-based head of product management for offshore renminbi at Deutsche Bank.
Average yields on Dim Sum bonds have dropped 29 basis points, or 0.29 percentage point, this year to 3.46 percent yesterday, according to an index compiled by Deutsche Bank and Standard and Poor’s. It touched 3.395 on April 30, the least since September 2011. The yield on corporate dollar bonds in Asia declined 15 basis points over the same period to 3.557 percent, a Bank of America Merrill Lynch index showed.
“The new rule will reduce banks’ requirement to hold liquidity and encourage them to lend more, driving down yields in general,” Lee said in an e-mail interview on April 30. “This is good for the Dim Sum market in general as it makes the cost of borrowing lower.”
Manufacturing in China is showing signs of slowing, which could weigh on borrowing demand. The final April reading of 50.4 for a Purchasing Managers’ Index released yesterday by HSBC Holdings Plc and Markit Economics compares with 51.6 for March. A number above 50 indicates expansion. An official guage today on the nation’s services industries also expanded at a slower pace last month.
The yield on China’s benchmark 10-year government bond fell 11 basis points last month to 3.43 percent, according to ChinaBond data. The cost to insure sovereign notes in China against non-payment has risen five basis points this year. Five- year credit-default swaps were quoted at 71.5 basis points on May 2 in New York, according to data provider CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market.
Hong Kong banks will get a “modest” benefit in terms of growth and profitability from the relaxed rules, which increases their capacity to put money into other yuan-denominated investments, Sabine Bauer, an analyst at Fitch Ratings Ltd. in Hong Kong, said in an e-mail interview yesterday. Currency risks and restrictions on cross-border lending will limit growth, she said.
The yuan rose to a 19-year high against the dollar yesterday amid speculation U.S. monetary stimulus will spur faster gains. The currency slipped 0.01 percent today to 6.1568 per dollar as of 12:04 p.m. in Shanghai and dropped 0.03 percent to 6.1588 in Hong Kong.
“Demand for offshore yuan loans in Hong Kong isn’t that strong as the yuan isn’t fully convertible, making it less a recognized currency for lending,” said Steven Chan, a Hong Kong-based analyst at Citic Securities International Co. “As the yuan is appreciating and the interest rate for yuan loans in Hong Kong is higher than for U.S. dollars and Hong Kong dollars, why would a corporate borrow in yuan in Hong Kong?”
Onshore Vs Offshore
Australia & New Zealand Banking Group Ltd. (ANZ) also doesn’t expect “a surge in yuan loans immediately because it remains easy for Chinese corporates to borrow onshore,” according to Raymond Yeung, the bank’s Hong Kong-based senior economist.
Rising supplies of the currency boost the appeal of borrowing in the city. Cross-border yuan trade is driving Hong Kong’s supplies of the Chinese currency, with settlements reaching a record 341 billion yuan in March, according to Bloomberg Industries data.
Sichuan Expressway Co. borrowed 1 billion yuan in a two- year offshore term loan last month, according to three people familiar with the matter. HSBC was among nine banks which joined the transaction that paid a fixed rate of 4.3 percent, the people said.
Hong Kong’s rule loosening comes as cities including Taiwan, London and Singapore vye to become the premier offshore trading hub. Global yuan payments increased 33 percent in March from February versus an average 5.1 percent gain across all currencies, the Society for Worldwide Interbank Financial Telecommunication said April 25. The renminbi’s share of global payments rose to an all-time high of 0.74 percent, 13th highest in the world.
“The HKMA’s move was a response to competitive pressure from Taipei, which doesn’t have any NOP limit requirements for renminbi lending,” said Chi Lo, a Hong Kong-based senior strategist at BNP Paribas Investment Partners, which managed the equivalent of $660 billion of assets globally as of Dec. 31. “These moves increase the banks’ renminbi liquidity, and that should stimulate renminbi lending. It will also put competitive pressure on other centers.”