HONG KONG, Sept 21: Booming offshore yuan loans from a weaker currency outlook and lower borrowing costs in Hong Kong, are making local banks’ yuan businesses more lucrative and a growth driver of their earnings.
The offshore yuan loan market, also known as the dim sum loan market, is a late comer compared with dim sum bonds and yuan cross-border trade settlement, which have been at the frontline of Beijing’s efforts to internationalise its currency.
One of the key reasons offshore yuan loans lagged was that the yuan appreciated sharply in 2010 and 2011, when the offshore market sprung up and corporates preferred not to take on yuan debt if they could have access to dollar loans.
However, the situation changed this year with the Chinese currency depreciating as much as 1.5 percent from the beginning of the year to July 25. That boosted outstanding yuan loans in Hong Kong to 60 billion yuan ($9.52 billion) by the end of July, almost double the amount by the end of 2011.
A banker in charge of treasury sales business in Hong Kong told Reuters that he now saw more Chinese corporates opting to take yuan loans here with their letters of credit issued by mainland banks. They mostly chose dollar loans, previously.
The offshore yuan borrowing rates through loans can be around 100 bps cheaper than onshore, analysts said. Yuan loans also avoid currency mismatach risk and may be easier for some companies to take on in Hong Kong than on the mainland.
Banks are also seeing the rewards from their yuan business. Bank of China Hong Kong, the region’s offshore yuan clearing bank, said last month its net interest margin rose by 43 basis points to 1.64 percent year-on-year in the first half of 2012, due to the increased deployment of RMB funds in lending and investment, as well as better pricing of new loans.
‘It is very likely for the outstanding yuan loans in Hong Kong to reach 100 billion yuan by the end of this year,’ said Banny Lam, chief economist at China Construction Bank International, adding that the yuan loan business was a very good growth driver for banks and would see vigorous growth in the next few years.
Big banks in Hong Kong, in particular, will enjoy rich profits from the dim sum loan business as they have sufficient yuan deposits to extend loans but pay relatively lower rates for yuan deposits. Smaller banks, on the other hand, struggle with less supply of yuan funds, Lam said.
Offshore yuan deposit rates have been on the rise given more channels are available for investment with better returns. As a result, banks compete with one another to provide aggressively high yields, with the one-year yuan deposit rates of some banks now surpassing onshore benchmark rates.
In addition, Hong Kong banks will face fierce competition from Taiwan banks which are going to share the big pie quite soon.
Taiwan’s central bank signed a pact on a clearing system for the yuan with the People’s Bank of China earlier this month to expand its yuan business and banks there are now eyeing the profitable loan business.
WEEK IN REVIEW: * Taiwan’s central bank said on Monday it has picked the Shanghai branch of state-owned Bank of Taiwan to be the clearing bank for Taiwan dollar transactions in China, under a landmark currency clearing system agreement signed earlier this month.
China’s Harvest Global Investments was approved for a 2 billion yuan quota at the end of August to launch a yuan exchange traded fund targeting the mainland’s stock index under the Qualified Foreign Institutional Investor scheme, following China AMC, E-fund and CSOP Asset Management. * The world’s first offshore yuan currency futures market debuted in Hong Kong on Monday in a move backed by Beijing, underlining its ambition to slowly internationalise the currency, but interest was muted among investors.
China encourages mainland banks to extend yuan loans to overseas projects and will start individual cross-border settlements in yuan, the country’s central bank said in a blueprint of financial reforms between 2011 and 2015, adding it welcomes other countries to include the yuan in their foreign reserves. * Indian ICICI bank tapped the dim sum bond market through its Singapore branch. The bank issued a 500 million yuan, three-year bond with a coupon of 4.9 percent, which was well received with books eight times covered and orders from more than 100 participants.
(AGENCIES)
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