HONG KONG Companies issuing yuan denominated bonds are finding that raising funds in Hong Kong is the easy part. It's getting the money into China that's hard.
In addition to revealing China's famously deliberate bureaucracy, the Hong Kong-to-China lag in yuan remittance highlights the risks issuers are taking with the deals, particularly at a time when Beijing is still unsure about Hong Kong's newly created yuan-denominated bond market.
For the first batch of bond deals, the money was raised quickly, and the yuan proceeds made it to China roughly three months after initiating the proper Chinese government approvals.
While foreign executives rarely expect speed when conducting a transaction in China, three months to transfer money is quite a long time considering in most cases it's a tap of a button.
"That is part of the process and, yes, that can be time consuming," said one Hong Kong based investment banker who has arranged a dim sum bond. "You have to apply. You have to get approval to get it back on shore."
Bankers involved in the deals say that companies are aware of the time it takes, and are exploring alternate uses for the yuan bond proceeds they have raised here.
Until the approvals come through, recent issuers are looking to use these funds for regular trade financing activities within the territory and, in the case of some foreign issuers, swapping them back into other currencies and remitting them homewards.
The ultimate worry is if a company raises money through a yuan bond in Hong Kong, and Beijing decides it wants to slow down the outside yuan proceeds coming in. In that scenario, the months-long delays could stretch even longer.
When U.S. burger chain McDonald's Corp (MCD.N). and U.S. heavy machinery maker Caterpillar (CAT.N) issued their yuan bonds, the remittance process took around three to four months, according to bankers involved with the deals.
"We were able to get our funds to the mainland quickly with no issues," said Jim Dugan, Caterpillar's Chief Spokesman.
Bankers involved in that transaction say they actually needed to start the remittance process several months before the actual bond issue, in order to get the money delivered soon after the offer hit the market.
Chief among the obstacles getting in the way of the fund transfers are China's own accounting rules. Even though the money raised in Hong Kong is yuan-denominated, Chinese regulators treat the proceeds as a foreign currency.
So to get the money into China, the companies need to not only file for permission with provincial officers where the money will be used but also they need central government permission as well.
Issuance in the fledgling yuan bond market has boomed since China's authorities relaxed cross-border trade settlement rules in July. There has been more than 41 billion yuan ($6.2 billion) raised through dim sum bonds this year. That's more than double last year's total, with most coming in the second half of the year.
Australia's No. 4 lender ANZ Group (ANZ.AX) recently issued a 200 million yuan bond. In addition to bonds, stocks in Hong Kong may also be used to raise yuan.
Cheung Kong (0001.HK), the property flagship of billionaire Li Ka-shing, plans to launch the first yuan-denonimated IPO in Hong Kong.
Beijing's watchful eye of this market is trained on the perception of whether the Hong Kong funds coming in are a steady flow, or hot money.
Contrary to expectations that the growth of the "dim-sum" bond market would mean greater ease of remittance, bankers involved with the deals say the regulatory process is unlikely to get quicker anytime soon.
Chinese authorities, particularly the foreign exchange regulator, has stepped up efforts to check cross-border capital inflows in the last two years.
"It is the same as before whether it is Chinese companies or multinationals -- the process has not changed a bit," said a senior banker at a European bank in Hong Kong.
A three-month lag in remittance is fairly standard in China, for any currency.
China operates a virtually closed capital account and authorities are fearful of hot money inflows swamping the mainland, betting on more yuan gains. Economic experts credit this system with allowing China's financial system to get through the 2008 financial crisis relatively unscathed.
With China in the midst of a rate tightening cycle, bankers are telling interested companies to go for it anyway -- raise the money and worry about the remittance later.
(Additional reporting by Nethelie Wong in HONG KONG and James Kelleher in CHICAGO; Editing by Muralikumar Anantharaman)