January 25, 2013 / 4:01 AM / 5 years ago

CNH Tracker-Tight yuan funds offshore may cap new loan business

By Michelle Chen
    HONG KONG, Jan 25 (Reuters) - The long-awaited cross-border
yuan loan scheme between Hong Kong and Qianhai in southern
China, a $45 billion financial zone in the port city of
Shenzhen, is drawing nearer with the first batch of banks
involved to be announced next week.
    The pilot programme, which will help deepen Hong Kong's yuan
business, is another step in China's ambitions to become a
financial centre and broaden international use of its currency.
    But analysts said that tight offshore yuan liquidity in Hong
Kong, which is likely to persist throughout the year, may limit
profit margins, thus capping the benefits to be brought by the
new loan business from the special economic zone.
    "We expect demand for offshore RMB borrowing to hold up in
2013, supported by continued low borrowing costs in Hong Kong
and continued funding demand from Chinese corporations to fund
their foreign trade-related activities," said Sonny Hsu, a
senior analyst at Moody's in a report.
    China set up the Qianhai business zone offering freer
currency movements and Hong Kong professional standards last
June. The government released rules in December for companies
that incorporate in the area to borrow yuan loans from Hong Kong
banks with interest rates and tenors to be fixed independently.
    Bank of East Asia has lodged an application for
extending a cross-border yuan loan to a customer incorporated in
Qianhai and is waiting for approval, the bank's spokeswoman told
Reuters on Thursday.
    A senior banker at a Hong Kong lender participating in the
new business said banks will sign an agreement next Monday in
Shenzhen on the cross-border yuan loan programme, but the quota
for each bank is not expected to be large initially.
    The move will impel banks to migrate part of their yuan cash
or deposits with China's central bank to the more lucrative loan
business, which will widen their sources of income in addition
to boosting interbank lending and yuan product investments.
    However, the limited pool of offshore yuan funds available
to banks may squeeze their returns due to the relatively high
interest rates they have to pay to secure yuan deposits,
analysts say.
    "We expect the average deposit spread of the utilised
offshore RMB deposits will be reduced by 100 bps (basis points)
in 2013 given the sharp rise in funding costs," said Steven
Chan, an analyst at Citic Securities International.
    Chan said the offshore yuan lending rate was about 5.5
percent in 2012, still 50 basis points below the 1-year
benchmark lending rate in mainland China, and room for upside
was quite limited this year.    
    Most analysts expect yuan deposits in Hong Kong to grow only
mildly to reach 700 billion to 800 billion yuan ($113-$129
billion) by the end of this year, keeping yuan offshore
liquidity at a relatively tight level.
    Hong Kong's yuan deposits were flat last year, standing at
571 billion yuan by November, still 9 percent lower than the
peak recorded in November 2011, due to more balanced trade
flows, a main channel for offshore yuan accumulation.    
   * BNP Paribas and Deutsche Bank are
among potential financial firms likely to issue the first
Chinese yuan bond in Taiwan, eyeing a market expected to reach 2
billion yuan this year, two sources with direct knowledge of the
situation said on Thursday. 
   * Citibank (China) said on Thursday it had completed its
first cross-border lending transaction denominated in yuan on
behalf of a European food company, helping to optimise the
company's treasury activities by leveraging its China
operation's surplus cash to the group's treasury center in
   * Yuan trade settlement transactions handled by banks in Hong
Kong registered some 30 percent growth and exceeded 2.6 trillion
yuan in 2012, while the size of the dim sum bond market - bonds
issued outside of China in yuan - grew by 60 percent to 230
billion yuan, data from the Hong Kong Monetary Authority showed.
   * Yuan transactions in the United States slid 38 percent in
December from November, making 2012 a flat year for growth of
the Chinese currency in the world's largest economy, global
transaction services organisation SWIFT said on Wednesday.
   * VTB Capital, the investment unit of Russia's No.2 lender
VTB, reopened its October 2015 dim sum bond, raising 1
billion yuan at 3.802 percent, according to a term sheet seen by
Reuters. Fund managers swallowed 61 percent of the deal, while
investors from the UK and the rest of Europe took 5 percent and
13 percent, respectively.
   * Standard Chartered Bank said its Renminbi Globalisation
Index rebounded to hit a new high of 737 in November, up from
731 in October, supported by growth in dim sum bonds and
certificate of deposits outstanding volume, offshore deposits as
well as trade and other international payments.
    Hong Kong's yuan loans: link.reuters.com/jyz45t
    Book runner:          Proceeds (RMB mln):       # of issues:
    1.HSBC                       4,918.0                   13
    2.Standard Chartered         2,618.0                    6
    3.National Australia Bank    2,000.0                    3
    4.BNP Paribas SA             1,951.0                    6
    5.Agricultural Bank of China   976.7                    2

    * Thomson Reuters data as of Jan. 24. 
CNH Tracker-New HK measures likely to improve banks' yuan
Dim sum bond market shrugs off worries a more open China might
eat its lunch 
More stories about the CNH market                 
Daily onshore yuan reports                        
Daily China money market reports                  
Offshore yuan rate    Onshore yuan rate  
Offshore yuan dealt Onshore yuan on CFETS 
Offshore yuan bonds 
($1 = 6.2180 Chinese yuan)

 (Editing by Jacqueline Wong)

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