CNH Tracker-Offshore yuan loans to pick up on weak currency, policy boost

HONG KONG Thu May 29, 2014 12:49am EDT

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HONG KONG May 29 (Reuters) - Hong Kong's yuan loans market is set to revive with the Chinese currency trapped in its longest downtrend since its 2005 revaluation and as the mainland rolls out pilot schemes to boost cross-border lending activities.

Corporates have long avoided yuan loans as the "redback" had steadily appreciated for years, making repayment of yuan debt more expensive when these loans came to maturity.

"The sustained weakness of the yuan and policy easing recently is providing a golden opportunity for the offshore yuan loan market to take off," said Wang Ju, a senior strategist at HSBC.

Hong Kong's yuan loans market took off after the territory's yuan clearing agreement was modified four years ago.

Outstanding yuan loans stood at 123 billion yuan ($19.7 billion) at end-February, according to statistics from the Hong Kong Monetary Authority (HKMA).

The market seems especially dwarfed compared with the dim sum bond market, which reached 704 billion yuan at the end of April, including certificates of deposits (CD).

However, the dramatic fall of the Chinese currency this year will likely inject fresh life into the loan market.

The yuan has entered a weakening cycle since the beginning of the year as China's central bank took action to squeeze out hot money betting on one-way appreciation in its currency.

It has lost 3.2 percent since the start of the year after appreciating more than 30 percent since its 2005 landmark revaluation, wiping out all its gains recorded last year. It is one of 2014's worst performers among its emerging market peers.

Details to get business in the Shanghai free trade zone moving were recently unveiled by Beijing while regulators also announced easing of constraints on cross-border guarantees.

Institutions and individuals in the Shanghai free trade zone will be allowed to set up specially tagged bank accounts, effective immediately, to create a closely managed opening in the country's capital account for the zone.

Foreign direct investments and repayment of self-owned yuan loans with duration longer than six months borrowed from Shanghai financial institutions are allowed between a resident's free trade account and the same name domestic settlement accounts.

Previously, mainland companies who faced hurdles raising funds onshore and wanted to capitalise on cheaper yuan funding offshore could not easily channel monies back to China due to Beijing's tight controls on the capital account

The State Administration of Foreign Exchange also streamlined the process for cross-border guarantees and deleted the quantitative limits for financial institutions issuing such guarantees.

This will greatly activate the demand for offshore yuan loans which are much cheaper than those in the mainland. Bankers say the cost of a one-year loan denominated in yuan is around 4 percent in Hong Kong, while in China it is more than 6 percent.

Adding to the momentum will be the Hong Kong-Shanghai stock connect scheme that is poised to be launched in October.

With investors in Hong Kong to be permitted to carry out A-share margin financing, there will be demand for yuan loans, said Andrew Fung, executive director of Hang Seng Bank .

A well-developed yuan loan market helps improve the CNH Hibor curve, which offers a benchmark to structure more complicated yuan products that can be used by global investors to participant in the market and hedge risks.

WEEK IN REVIEW:

* Singapore's Fullerton Fund Management said on Monday it had been granted a renminbi Qualified Foreign Institutional Investor (RQFII) licence, becoming one of the first Singapore-based entities to be given such a licence.

* China CSOP Asset management and London-based Source announced on Monday the launch of a Euro trading line for their FTSE China A50 exchange traded fund (ETF) on the Deutsche Börse Xetra, offering more European investors direct exposure to China's stock market.

* Banks in Hong Kong have started to provide yuan structured deposit products to investors who are betting the Chinese currency will depreciate in coming months, amid weak sentiment over the outlook for China's economy and currency.

CHART OF THE WEEK:

Yuan loan market in Hong Kong remains at an initial stage: link.reuters.com/fen69v

RECENT STORIES: Hong Kong banks offer structured deposits to yuan bearish investors CNH Tracker-China's debt yields converge slowly, even amid FX volatility

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($1 = 6.2556 Chinese Yuan) (Editing by Jacqueline Wong)

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