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Foreign firms turn to FX swaps to fund Chinese operations

An employee carries bundles of 100 yuan Chinese bank notes to store after counting at a bank in Taiyuan, Shanxi province July 4, 2013. REUTE
An employee carries bundles of 100 yuan Chinese bank notes to store after counting at a bank in Taiyuan, Shanxi province July 4, 2013. REUTE

By Saikat Chatterjee and Michelle Chen

HONG KONG (Reuters) - Foreign companies are increasingly using cross currency swaps to fund onshore operations in China rather than raising money via the Dim Sum bond market in Hong Kong.

Multinational companies said that they could raise more money, more quickly and more cheaply by borrowing in dollars and swapping the money into yuan than if they borrowed directly in yuan through the offshore yuan-denominated bond (Dim Sum) market in Hong Kong.

"We swap from euros into renminbi for the maturity we want, which is a very straight forward treasury technique and that means we can have a fixed rate interest loan into China," said a regional treasury head in Asia at a multinational firm who declined to be named as he was not authorized to speak to media.

Companies' growing use of currency swaps comes means less issuance in the $80 billion Dim Sum market, especially as the cost of issuing Dim Sum bonds has risen to become no cheaper than borrowing in China.

Rohit Srivastava, a New York-based executive director at JP Morgan, said it was easier for multinational companies to lend to their Chinese subsidiaries in yuan than in U.S. dollars because it was time consuming for subsidiaries to get approval to borrow in dollars.

"Recent yuan liberalization measures have allowed them to take the FX risks away from the local subsidiary, aggregate such risks at the parent level and then hedge the net exposures using the offshore deliverable or non-deliverable markets," he said.

Currency swaps are widely used in most Asian countries as a way of accessing local currencies without assuming foreign exchange risk. China is playing catch-up in this regard thanks to gradual regulatory changes.

On July 10, the People's Bank of China (PBOC) broadened some of its pilot programs, including one that allows companies operating in China to move yuan more easily across borders.

It is also much cheaper for foreign companies to borrow in dollars and swap them into yuan. Rather than borrow in yuan, a company can save 100 basis points in borrowing costs by swapping dollars into yuan and then lending the money as a shareholder loan to its onshore subsidiaries.

It is even more expensive for a Chinese subsidiary to borrow yuan in the onshore bank market.

YUAN RISING

Foreign companies have taken to these currency swaps with gusto. Monthly swap trading volumes have jumped to about $5 billion from just a few hundred million dollars in early 2012, traders estimate.

That contrasts with falling trading volumes in the secondary bond market, which is the dominant asset class in offshore yuan. Equity funding is down to barely a handful of deals.

Another treasurer at a multinational company with extensive operations in China said he could raise 10 times as much in international markets than he could in the offshore yuan bond market, which was another reason to borrow in dollars and swap into yuan.

Notwithstanding restrictions on how much companies can inject onshore via this route, the share of foreign direct investment into China denominated in renminbi has increased enormously since it was first allowed in October 2011.

Nearly half of foreign direct investment going into China in the first six months of this year was denominated in yuan, compared to about 35 percent in 2012, according to PBOC and Deutsche Bank estimates, indicating more companies are using this route.

But with the liquid three-year currency swap rate trading at a record 2.4 percent, versus 1.2 percent in May, much of the savings has disappeared for shorter tenors.

Market strategists, however, said that companies could still book big savings by using longer-maturity tenor swaps.

(Editing by Simon Cameron-Moore)

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