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CNH Tracker-Weak yuan outlook bodes well for dim sum loan market
February 5, 2015 / 6:34 AM / 3 years ago

CNH Tracker-Weak yuan outlook bodes well for dim sum loan market

HONG KONG, Feb 5 (Reuters) - After years of struggle to expand, the offshore yuan loan market appears set to get a boost from a weak outlook for the Chinese currency this year.

The “redback” which lost 2.4 percent against the dollar last year, its first significant annual loss since the landmark revaluation in 2005, has already declined 0.8 percent so far this year.

For the past two weeks, it has been trading quite close to the lower end of the daily trading band and if it were not for the strong midpoints set by the central bank, the yuan would have fallen further, traders said.

The expectation of yuan appreciation in the past decade boosted yuan transactions, but hampered yuan borrowing as companies were wary of increasing cost, said He Guangbei, vice Chairman and the Chief Executive of Bank and China Hong Kong .

“But last year is different and yuan borrowing jumped so much. We’ve seen people very willing to hold yuan assets before, and now people are willing to hold some yuan debt as well,” He said.

The outstanding yuan loans increased to 178 billion yuan ($28.45 billion) by the end of last November, up 54 percent from the end of 2013, the latest statistics from the Hong Kong Monetary Authority showed.

The growth momentum is likely to continue as most analysts see further downward pressure on the Chinese currency on the back of a strong dollar, with some expecting the yuan to fall to 6.4 percent by the end of the year, versus 6.25 in afternoon trade on Thursday.

Growing expectations of monetary policy easing spreading across Asia hurt sentiment towards regional currencies over the past two weeks, with short positions on China’s yuan at a near 10-month high, a Reuters poll showed on Thursday.

While pessimistic sentiment toward the yuan has dampened some investors’ appetite to hold yuan assets, it is seen as a catalyst for activating the offshore yuan loan market as hedging cost for dollar loans has surged recently. (For a related story, click )

Chinese firms, especially property ones, have borrowed heavily via U.S. dollar loans in offshore markets, as it was much cheaper than borrowing yuan in the mainland. Most of these companies have not yet hedged for the currency mismatch.

The one-year forward contract surged to record highs of over 2,500 points on Wednesday, implying a hedging cost of more than 4 percent, erasing nearly all the cost saving from borrowing dollars.

Bankers say a top tier Chinese company can get a three-year dollar loan with an interest rate of less than 3 percent in the offshore market. As a comparison, it may need to pay 6-7 percent for a yuan loan in mainland China.

The U.S. central bank has kept its short-term interest rate near zero since December 2008. However, the super cheap dollar funding is set to end as an improving U.S. economy has prompted the Federal Reserve to start preparing markets for rate hikes, possibly starting in the second half of this year.

WEEK IN REVIEW:

* The head of the Shenzhen Stock Exchange said the design of the Shenzhen-Hong Kong stock connector scheme has been completed and will match the design of the currently running Shanghai-Hong Kong stock connector scheme, the official Securities Times reported on Monday.

* Standard Chartered Bank said on Tuesday it had completed a transaction to provide 50 million yuan ($7.99 million) in cross-border loans from its Singapore branch to Tianjin Eco-City Keppel New Energy Development.

* HSBC said on Wednesday it had completed its first transaction under the Free Trade Account in the China (Shanghai) Pilot Free Trade Zone by implementing a trade financing deal for a corporate client.

* Yuan deposits in Hong Kong rose 3 percent to 1,003.6 billion yuan ($160.35 billion) in December from the previous month, according to the Hong Kong Monetary Authority. Cross-border trade settlement stood at 657.8 billion yuan for the month.

CHART OF THE WEEK:

Offshore yuan loan market growth: link.reuters.com/dah93w

RECENT STORIES: China’s yuan marches toward major global currency status Offshore yuan bond issuance in HK seen shrinking for first time

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 THOMSON REUTERS SPEED GUIDES

$1 = 6.2561 Chinese yuan renminbi Editing by Shri Navaratnam

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