A month on, offshore Rmb rates do not ‘reflect reality’

Issue: Daily News - 3 May 2012

Keywords: Offshore renminbi, TMA, loans

Eight banks have now posted offshore renminbi lending rates for a month, the latest step to establish a pricing benchmark for the nascent loan market. But bankers are still sceptical that there will many deals in the market for the rest of the year — and argue these rates are little more than symbolic. 

Bank of China (Hong Kong), HSBC and Standard Chartered have all been posting offshore renminbi interbank offer rates since the start of the year, helping Hong Kong’s Treasury Markets Association try to establish a benchmark for the market. But they were joined by five other banks at the start of April, raising hopes that a realistic rate would emerge.

That has not happened, according to loans bankers. Chinese banks are actively closing bilateral deals using the offshore renminbi, but the syndicated loan market has yet to bloom. There have only been a handful of deals so far, and bankers do not expect a big rise in business before the end of the year. This is partly because many banks still see the benchmark rate as hypothetical.

“It’s a reference rate, but it doesn’t mean that we can actually borrow at that rate,” said a loans banker at a mainland bank. “It’s a good start, but it doesn’t reflect the operational reality for banks that need to fund in the currency.”

Most bankers argue that the deposits are concentrated within only a handful of banks, meaning that at least some of those posting rates on the TMA website do not have a big capacity to lend. This situation could be exacerbated by four consecutive months of falling deposits, although some of these deposits may have been transferred into other cities.

Some bankers argue that even if the TMA offshore renminbi offer rates were realistic, and represented a liquid interbank lending market, they would not lead to a major boost in loan volumes.

“The major thing putting borrowers off is the appreciation of the renminbi,” argued a senior loans banker in Hong Kong. “Lenders are indifferent to the appreciation, but it can deter a lot of companies. That is not going to change anytime soon.”

But others point out that loan volumes are still well below the volumes being achieved in the bond market, proving that despite renminbi appreciation fears, there is still big demand for renminbi funding that is not ending up in the loan market.

Bilaterals improving

The syndicated loan market may still be struggling, but there has been a big increase in bilateral and small club deals this year, said a syndication banker at a mainland bank. Banks tend to use their own offer rates for bilateral deals, making it easy for them to quote a realistic rate for borrowers. This sometimes applies even when other lenders are bought into a deal.

E-Land Fashion China Holdings, the mainland subsidiary of Korea’s E-Land Group, closed a dual-tranche HK$333m loan at the end of February. HSBC was the sole coordination of the deal, which featured a Rmb144.5m tranche.

But while China Construction Bank, Hang Seng Bank, Tai Fung Bank and Wing Lung all committed to the deal, the renminbi margin was paid over HSBC’s own offshore renminbi offer rate.

The five banks that joined Bank of China (Hong Kong), HSBC and Standard Chartered in posting offshore renminbi offer rates on April 2 are: Bank of Communications, Bank of East Asia, Bank of Tokyo Mitsubishi UFJ, HSBC, ICBC (Asia) and JPMorgan.

Offshore renminbi deposits fell to Rmb554.3bn in March, according to the latest data available from the Hong Kong Monetary Authority. That was the fourth month that renminbi deposits in the region had fallen, and represented a drop of almost 10% down the record of Rmb627.3bn deposits set in November last year.

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