China opens onshore market to foreign lenders

The first group of banks in Hong Kong has received the green light to issue renminbi loans to onshore mainland companies in a scheme hailed as a significant step forward for renminbi globalisation and China’s interest-rate liberalisation.

Fifteen Hong Kong-based banks signed an agreement yesterday to issue loans of up to Rmb2 billion ($321 million) to enterprises in the Qianhai district of Shenzhen for 26 projects. Tenors and interest rates of the loans can be set independently rather than following the benchmark rates set by the People’s Bank of China (PBoC).

This is the first time China has opened its domestic lending market to offshore competition since 1949. Analysts say that while this is a good move, the programme will be limited to the Qianhai area as China considers that its banking system is not yet ready to face foreign competition.

Net profit growth for China’s commercial banks is forecast to fall to 7% to 8% in 2013, compared with an estimated 17% in 2012, due to a two-year economic slowdown and rising bad loans, Bank of Communications said in a research note.

All of the 15 banks have renminbi businesses and are active in the mainland market. They include HSBC, Standard Chartered and Bank of East Asia, as well as the Hong Kong operations of China’s top lenders.

HSBC said the potential benefit of this development goes beyond mere economics. “When it is fully developed,” said Anita Fung, the bank’s Hong Kong CEO, “Qianhai will form a bridge where the mainland can try out new accounting and legal measures, and a protected environment where international service industries can learn more about doing business in China.”

HSBC estimated that the renminbi will be fully convertible by 2017.

Standard Chartered noted the programme will not only foster the development of the offshore renminbi market and further open up China’s capital account, but also bolster demand for renminbi loans and invigorate cross-border renminbi liquidity between the mainland and Hong Kong.

The new policy offers banks in Hong Kong a new channel to deploy their renminbi funds and promotes renminbi circulation between the two places, facilitating the development of cross-border renminbi business, said Bank of China (Hong Kong) in a statement.

Standard Chartered launched a renminbi index late last year to capture the currency’s growing internationalisation. The index tracks four products in Hong Kong, London and Singapore: offshore renminbi deposits, trade settlement and other international payments, dim sum bonds and certificates of deposit, and foreign exchange turnover.

HSBC, Standard Chartered and Deutsche Bank have all conducted similar renminbi surveys, suggesting that a growing number of overseas companies are choosing to settle trade in the Chinese currency to improve their position in price negotiations when doing business with partners in the world’s second-biggest economy.