November 20, 2014 / 7:40 AM / 6 years ago

CNH Tracker-Stock connect scheme reduces dim sum issuers'costs

HONG KONG, Nov 20 (Reuters) - The launch of the Shanghai-Hong Kong stock connect scheme this week has reduced borrowing costs for foreign companies looking to issue yuan-denominated debt in the offshore markets and may lead to more issuance in an already record year.

A link that lets Hong Kong and Shanghai investors buy and sell shares on each other’s bourses debuted on Monday, boosting hopes of more capital flows into equities as investors rush to find bargains in the bourses.

But while stock punters have met with early disappointment as both Hong Kong and Shanghai stocks lost some of their pre-launch gains, foreign issuers of offshore yuan debt are licking their lips at the prospects of cheaper borrowing costs.

Expectations of a shortage of the Chinese currency in Hong Kong had risen in recent months making it increasingly expensive for yuan borrowers as foreign investors can only participate in the stock connect scheme using the yuan.

That rise in the cost of offshore yuan has, owing to the widening interest rate gap with the U.S. dollar, driven up the cost of swapping dollars for yuan in the currency forwards.

Those looking to borrow yuan by swapping their dollars now have to pay a record 3 percent for one-year FX swaps , three times the rate in February.

This jump in swaps however benefits those that are on the opposite side of the FX swap trade, which is foreigners who are borrowing in the offshore yuan market and swapping that yuan into dollars.

This week has seen issuance in the dim sum market by new South Wales Treasury Corporation and Caterpillar.

Bankers do not expect a lot more dim sum issues at this point, however, as international capital markets are awash with easy money, and borrowing costs in yen and euros are as competitive as offshore yuan and the supply of those currencies is more plentiful.

Moreover, Hong Kong regulators have taken a raft of measures to ensure that introduction of the stock connect scheme does not result in a shortage of offshore yuan.

Last week, Hong Kong has removed a daily 20,000 yuan conversion limit imposed on residents since 2004, established a 10 billion yuan intra-day repurchase facility and assigned seven banks to work as primary liqudiity providers to ensure a stable offshore yuan rate.


* Bank of China, the sole clearing bank for the Shanghai-Hong Kong stock connect scheme, cleared 12.08 billion yuan (1.97 billion U.S. dollars) for Hong Kong Securities Clearing Company Limited with a southbound trading turnover of 407 million yuan for China Securities Depository and Clearing Corporation Limited, Xinhua reported this week citing a bank statement.

* Four bonds from China Construction Bank, were listed on the Luxembourg Stock Exchange this week. The bonds are tranches of the bank’s 5-billion-U.S. dollar medium term note program and the first to be listed in Luxembourg. All four tranches are denominated in the Chinese currency.

* Away from the stock-connect scheme, the Australian stock exchange and Bank of China have agreed to work together to boost yuan trading in Australia. The fourth-biggest lender was appointed this week as the official clearing bank in Australia.


The offshore yuan pool in Hong Kong:

The growth of the offshore yuan pool in Hong Kong has fairly stagnated this year thanks to the emergence of new global yuan hubs around the world and the launch of a landmark stock connect scheme this week.

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Editing by Simon Cameron-Moore

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