Global companies that have business in China are increasingly issuing debt obligations in renminbi to finance activities in the Asian country, as for the first time in six years such a solution has become more cost-effective compared to the practice of raising funds in US dollars.
In recent years, a kind of generally accepted procedure has emerged in which multinational corporations receive financing in dollars or their local currencies, and then convert this money into renminbi. After that, the funds are provided in the form of loans to Chinese subsidiaries. In the past, interest rates in the United States were close to zero. For this reason, it was more profitable for global companies to raise financing in dollars. However, the situation has changed over time. In 2022, the Federal Reserve System, as part of the fight against inflation, began implementing a policy of aggressively raising interest rates. Against this background, financing in favor of the renminbi has become more obvious and unambiguously profitable. In the second half of 2023, this advantage transformed into something like an objective fact. The Fed has kept interest rates high. At the same time, China’s financial authorities had to lower the cost of borrowing. The need for an appropriate solution was because the growth of the Asian country’s economy began to slow down significantly after the coronavirus pandemic.
Traders and corporate advisers say that the difference in interest rates in the United States and China allows global companies to save between 150 and 250 basis points on interest costs by raising financing in renminbi.
Market experts also note that there is currently a sharp increase in demand for derivatives, which are also called cross-currency swaps, and bonds denominated in the national currency of an Asian country. This tendency is due to the lowering of costs and the additional benefits associated with the ability to avoid currency risks by raising funds where they are needed.
Desiree Pires, managing director and head of corporate sales at Standard Chartered in the United Kingdom, says that currently, borrowing in the national currency of an Asian country is becoming the preferred choice for those who may have needs in renminbi.
Raising funds in China’s national currency is an example of how global companies overcome numerous difficulties and challenges in the economic environment. It is worth noting that the vast majority of circumstances requiring a special approach and new solutions are in one way or another related to the consequences of the coronavirus pandemic, during which many processes in the business sphere were significantly slowed down. Global companies are also currently looking for new ways to bring down the cost of capital in conditions of high interest rates. Against this background, the international market is witnessing an increase in the acceptance of China’s national currency.
In the past, global companies have avoided using the renminbi as a source of financing. This feature, which is no longer actual, is because the national currency of China demonstrated a low level of liquidity. Currently, the position of the renminbi has changed in a positive sense. This was told to media representatives by a currency trader from one of the blue-chip companies based in the United States.
It is worth noting that in the foreseeable future, the advantages of the renminbi may either weaken significantly or be canceled altogether. The position of the national currency of the Asian country is likely to change in a negative sense after the Fed starts implementing a policy of cutting interest rates. It is worth noting that the financial regulator of the United States may begin lowering the cost of borrowing as early as this year.
Cross-currency swaps, which provide companies with the opportunity to exchange cash flows from one currency to another at a defined rate, have been increasing in recent months. This tendency is because, against the background of cutting interest rates in China, the differential between government bond yields in the United States and the Asian country has reached its highest level in recent years.
As of April 1, one-year cross-currency swaps between dollars and offshore renminbi were trading 2.28% lower than in the US. This was talked about by Amol Dhargalkar, global head of the corporate risk management advisory unit at Chatham Financial. The mentioned situation means that the company can save up to 228 basis points by borrowing funds in offshore renminbi. In this case, savings are implied compared to raising financing in dollars. The corresponding difference has widened by 300 basis points over the past two years.
Amol Dhargalkar says that, according to his observations, the growth in demand for offshore renminbi cross-currency swaps began at the end of last year. The expert noted that in the past there were no favorable opportunities for the mentioned swaps, but now a different situation is being fixed.
Data on the state of affairs in the over-the-counter market are patchy. In February, the volume of new contracts for cross-currency swaps in dollars/renminbi amounted to $5.5 billion. In December, this figure was equal to $4.7 billion. The relevant information was released by the over-the-counter clearing of the Hong Kong Stock Exchange, which clears some cross-currency swaps.
Also, debt obligations denominated in renminbi issued by non-Chinese companies and called panda bonds have already amounted to almost $50 billion this year. George Sun, managing director of the BNP Paribas Global Markets unit for Greater China, says that for the whole of 2023, the amount of the mentioned obligations could reach $143 billion.
The differential in exchange rates allows global companies to match assets and liabilities in the same currency relatively cheaply. Currently, the number of firms that seek to maintain their advantages for a longer period is increasing.
Most trades on cross-currency swaps with China were for maturities of up to 3-5 years. The demand for offshore renminbi for up to 10 years is also showing growth. This was stated by Antoine Jacquemin, Managing Director of Corporate Derivatives Sales at Societe Generale.
Garth Appelt, head of the foreign exchange derivatives and emerging market derivatives unit at Mizuho Americas, says that as a result of the exchange for renminbi or the currency of local operations, companies were able to protect the dollar value of local cash. The expert said that firms are a little worried about the cost of the entire investment, and not just about dividend payments and exports.
George Sun says that the companies’ strategy of raising financing in renminbi avoids the volatility of the national currency in the situation of any changes in trade policy after the presidential elections in the United States in November of the current year.
Former US President Donald Trump imposed tariffs on Chinese goods during his tenure as head of the country. This decision has become a kind of symbol of the end of the decade of free trade policy. The current President of the United States Joe Biden has retained the specified tariffs but is considering reviewing this decision.
George Sun says that global companies, in a period of uncertainty regarding the dynamic of changes in the situation in the sphere of trade strive to minimize the mismatch between currencies and exchange rates.
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