Published: May 01, 2012
Few discussions about the growth of world trade can exclude Asia, particularly China, with reference to both intra-region and global trade patterns. With continued market uncertainty and speculation about the future shape of the Eurozone, some companies have decided not only to direct their strategic focus towards Asia, whether for procurement, manufacturing or sales, but also to finance these activities locally. This trend does not conflict with that of centralisation of cash and treasury management activities into regional or global treasury centres. Indeed, as John Laurens notes in this month’s Treasurer’s Voice, we are witnessing a growth in Asian, and China-based shared services, including treasury. There are a variety of drivers for the growth of financing in Asia, as Asian multinationals seek to expand outside of the region, and foreign multinationals increase the scale of their operations within Asia. This article considers some of these recent trends, and features expert comment from John Laurens, Head of Global Payments and Cash Management, HSBC and David Koh, Head of Treasury Services, Greater China, J.P. Morgan.
David Koh, J.P.Morgan first explains why foreign multinationals are attracted to financing in Asia,
“The main driver for a company’s decision to source financing in Asia is access to liquidity. European markets remain uncertain, and it is as yet unclear as to how and when that uncertainty will be resolved. In contrast, Asia is seeing higher levels of liquidity, with considerable investment appetite amongst institutional investors and banks in Asia with ambitious growth plans in the region. This is encouraging multinational corporations, particularly those with a strategy for growth in Asia, to take advantage of liquidity opportunities, and so we are seeing them borrowing more here in a range of currencies.”
He continues by emphasising that in most cases, this financing is for specific business purposes within the region, as opposed to borrowing in Asia as an alternative to core funding,
“We are not seeing foreign multinationals (i.e., those headquartered outside Asia) borrowing in Asia with a view to repatriating funds, as the largest companies typically find it relatively easy to source funds in their local markets successfully and at a relatively low cost. They are, however, accessing finance to fund specific projects across Asia.”
2010 saw a continued increase in onshore RMB amongst foreign multinationals, but 2011 presented some challenges owing to the foreign RMB quota imposed by the Chinese government, that has since been lifted. Capital adequacy requirements differ in China, as David Koh, J.P. Morgan notes, which reduces counterparty risk,
“In China, banks’ loan books need to be self-funded through deposits, which is quite different to other parts of the world.”
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In many cases, borrowing directly in China is essential for foreign multinationals investing heavily in the country, due to restrictions on the use of offshore funds to finance internal investment, and balance sheet considerations such as how to move offshore RMB into China. There are changes occurring in this area, however, as David Koh, J.P. Morgan continues,
“An interesting recent development was that the National Development and Reform Commission (NDRC) in China increased the foreign debt quota significantly for a select number of banks, enabling offshore USD to be used to finance onshore activities.”
In addition, as John Laurens, HSBC indicated in the Treasurer’s Voice,
“Even the repatriation of RMB into China is beginning to open up as China takes its initial steps in opening up its capital account in support of the government’s policy to encourage economic growth.”
These trends may encourage companies to borrow RMB offshore, and may in fact fuel further financing, as offshore RMB (CNH) is freely convertible and the borrowing costs are a little lower than onshore. This is particularly the case bearing in mind the experiences that some companies had in China during 2011, as David Koh, J.P. Morgan outlines,
“2011 was an unusual year for financing in China. In an effort to control inflation, the Chinese regulator re-introduced an RMB quota, which has been used successfully in the past. There were more than a few cases where corporates found that they were not always able to draw on their facilities as their banks had fully utilised their quota.”
Lack of availability of financing is a significant risk, and as David Koh, J.P. Morgan continues,
“The outcome of this is that while corporate treasurers had stepped up moves over the past decade to rationalise their bank relationships, the opposite is now true in China, with treasurers seeking to ensure continued access to liquidity. While 2012 has seen the relaxation of the strict imposition of the RMB quota, treasurers do still need to manage their liquidity risk in China carefully.”
David Koh, J.P. Morgan considers that these restrictions during 2011 were partly responsible for the growth of offshore RMB financing over this period,
“I believe the market for offshore RMB financing expanded rapidly during 2011 in part due to the onshore RMB quota, but apart from a spike in dim sum bonds issuance before Chinese New Year in January, the financing market has been very quiet.”
However, there does seem to be activity in dim sum bond issuance, with a variety of companies seeking to exploit the relatively low rates and high demand amongst investors. John Laurens, HSBC expresses that,
“A broad spectrum of industries with material sources and uses of RMB are attracted to RMB financing, ranging from high tech companies with large scale manufacturing operations in China, which also represents a fast developing sales market given the growth in Chinese consumers. Similar statements could be made for branded goods companies, be they in high-end luxury goods or fast moving consumer goods and foodstuffs; all have increasingly large sources and uses of RMB which drives increased use of RMB cash management and financing techniques.”
In March 2012, Caterpillar sold RMB 1.26bn ($199m) of dim sum notes at 2.9%, higher than its previous two issues. Although financing rates are not significantly cheaper than the USD bond market, financing the business in RMB makes sense strategically, with nearly 30% of Caterpillar’s group revenue in 2011 derived from Asia Pacific, and a strong commitment to growth in China. By raising RMB through dim sum bonds, Caterpillar can reduce exchange rate related costs. Also in March, Ford Motor issued a heavily oversubscribed RMB 1bn ($158m) bond that will partially finance its expansion plans in China. John Laurens, HSBC summarises the advantages and disadvantages,
“Borrowing RMB in the offshore market is typically a little cheaper than onshore, and there are no FX control or regulatory approval requirements. However, there are lower levels of liquidity compared with the onshore market.”
David Koh, J.P. Morgan continues,
“Exporters in China will often be prepared to accept lower prices in RMB than in USD to avoid currency risk, and some companies which lack RMB revenue streams but with large RMB supplier costs will borrow RMB offshore to take advantage of this opportunity."
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John Laurens, HSBC emphasises that a key issue is how to use offshore RMB to finance operations in China, which could take a variety of forms, including cross-border trade settlement to repatriate funds, but shareholder loans are important internal funding tools,
“A primary area of consideration when borrowing in RMB surrounds the capital account, and in particular how to optimally use RMB to finance operations in China, such as using shareholder loans.”
Growth in the offshore RMB market is fuelled as much by the expansion of Chinese multinational corporations as it is by foreign companies. Increasingly, as John Laurens, HSBC describes, these companies are establishing treasury centres outside China,
“As Chinese companies develop their global footprint, they are looking to implement global best practices in cash and treasury management, which often includes an offshore treasury centre. Hong Kong, being close to home, has been a preferred location for establishing offshore treasury operations, but we are now also seeing these companies set up treasury centres further afield in locations such as Singapore, London and continental European cities.”
Growth in the offshore RMB market is fuelled as much by the expansion of Chinese multinational corporations as it is by foreign companies.
It is far more advantageous for these companies to finance the business in their home currency wherever possible, which they can repatriate through cross-border trade settlement, and the Chinese government is clearly motivated to support the growth of Chinese companies. David Koh, J.P. Morgan continues,
“Chinese companies are establishing sourcing arms in locations such as Hong Kong and obtaining large trade lines, which is becoming a more convenient option as regulatory hurdles are lowered. With a sharp spike in commodity prices, there is an increasing opportunity for issuing letters of credit through banks in Hong Kong, particularly for big ticket items.”
The expansion of Chinese companies overseas is also resulting in the evolution of liquidity management techniques to ensure that they maintain their cash and liquidity management efficiency, as John Laurens, HSBC illustrates,
“Many Chinese companies are growing through acquisition: in these situations, one of the first priorities is liquidity management, such as notional pooling, to achieve financial consolidation whilst enabling foreign operations to retain their autonomy. These developments are still in their early stages, but we envisage more to follow.”
He continues,
“With an increasing number of Chinese corporations looking to expand globally, so we would expect to see greater support from the Chinese government for them to achieve this, including strong support for the continued internationalisation and liberalisation of the RMB.”
Currently, most CNH activities are located in Hong Kong, where CNH became a deliverable currency in July 2010. However, this dominance may become less apparent in the future, particularly as Chinese companies open treasury centres in new regions, as John Laurens, HSBC articulates,
“Hong Kong remains the most significant CNH (offshore RMB) market, including dim sum bond issuance, but we are starting to see new CNH markets develop. For example, we were the first bank to issue a dim sum bond outside Hong Kong, with a CNH 2bn issue in London in April 2012, listed on the London Stock Exchange, tapping into the growing pool of RMB liquidity outside China.”
Others do not see the development of additional offshore centres happening as quickly, as David Koh, J.P. Morgan suggests,
“Although there is talk about an offshore RMB market developing in Singapore and London, in addition to Hong Kong where most transactions are undertaken currently, this needs to be supported by the Chinese regulators for it to become a reality. For a mature offshore RMB market to develop, there need to be more opportunities to use RMB, which remain limited at present. J.P. Morgan is at the forefront of RMB developments and is working closely with regulators and market participants to shape the RMB market as it evolves and matures.”
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It is unrealistic to predict how the financing market in Asia will develop in the future, as this depends not only on investor and issuer behaviour, but also government decisions regarding the liberalisation of the RMB. However, the growth of both Chinese and other Asian multinationals, together with more ambitious strategic expansion plans amongst foreign corporations, is likely to mean that financing through Asian centres, including in CNH, will continue strongly. John Laurens, HSBC highlights that the investor community is also growing,
“International RMB pools will become deeper, opening up the development of a broader range of financial instruments.”
David Koh, J.P. Morgan demonstrates that this expansion will accompany specific market and political trends,
“The offshore market will continue to develop in pockets, such as Hong Kong, Singapore, India and London. The Indian government recently approved the issuance of dim sum bonds, which has resulted in the first corporate in India issuing RMB-denominated debt, on the basis that a large proportion of their suppliers are based in China.”
Finally, as John Laurens, HSBC summarises,
“The shift in companies’ financing strategy simply reflects China’s place in the new world. Irrespective of industry, the global growth strategy of most companies is likely to involve China as a strategic market, whether for sales, manufacturing, procurement or all three.”
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