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European companies that ignore the renminbi are at risk of losing out especially given the rapid pace of the currency’s growth in the world.
The spotlight in March was on new offshore renminbi hubs. Just before the trip to Europe by president Xi Jingping, China signed agreements with Germany and the UK for clearing and settlement of the Chinese currency. In February 2014, the renminbi stood in eighth position as the most used currency in global trade payments, up from 13th place last January, according to Swift’s monthly RMB Tracker published on March 26.
“As this trading relationship continues to strengthen, the ancillary financing requirements will broaden beyond trade finance and into bond markets,” Andrew Stephen, Deutsche Bank’s head of private placements and local currency issuance for Asia told FinanceAsia. “Logic therefore dictates that the CNH market will continue to see increased volume of issuance from European corporates with business ties to China, whether from the need for direct onshore investment or from working capital requirements.”
This has been the case for larger European corporates with growing Chinese operations. In February, British oil and gas firm BP and Anglo-Dutch consumer goods company Unilever issued offshore renminbi bonds with sizes of Rmb163 million ($26.3 million) and Rmb50 million respectively for working capital purposes. This is an indication that the market remains open for business despite the slump in issuance.
According to Dealogic, European borrowers have only sold $713 million worth of CNH bonds, or six offerings year-to-date, a 33.3% drop from last year’s $1 billion of 14 transactions during the same period.
One of the main reasons for the decline in volumes is because cross-currency swaps (CCS) have not been as attractive as say, a year ago. The three-year point of the CCS curve, which was around 2% in the first quarter of 2013, has now dropped to 1.6%. This implies that there is a 40bp increase in cost for a borrower looking to swap back into US dollars, say DCM bankers.
That said, the CCS market tends to be used by commercially-driven or opportunistic borrowers with no real need for renminbi and where funding costs play a vital role. This means that the CNH market still remains open for those with a long-term genuine need for the currency, and as trade and investment flows between Europe and China continue to increase, renminbi-denominated funding is bound to rise.
According to the European Commission, the European Union and China are two of the biggest traders in the world. The Mainland is EU’s second trading partner behind the United States, and the EU is China’s biggest trading partner.
Carmakers’ rising redback demand
Renminbi — also called the redback, mimicking the US dollar’s equivalent greenback — bonds are becoming more useful tool for companies, especially carmakers. This is because China’s newly acquisitive consumers have found credit as a way to pay for big ticket items and Asian subsidiaries of European companies need strong local-currency cash flow to finance that demand.
Volkswagen’s auto financing arm, Volkswagen Financing China Corp, received its licence 10 years ago to provide funding to retail car buyers — the first time the Chinese government has licensed a foreign company to do so — and the German carmaker says it’s a thriving industry. As a result, other automakers have also established such entities, including the likes of Ford Motors, BMW and Toyota Motors.
“Renminbi bonds are established instruments in Volkswagen’s funding toolbox and are generally used to finance the increase of production capacity in China,” said Joerg Mull, executive vice president for Volkswagen China’s finance department in an email reply to questions. “But in future, we hope that the usage of proceeds will be broadened to a wider spectrum such as investments into automotive finance companies as this is an important and fast growing business for us here in China.”
In order to fund its Chinese operations, Volkswagen raised a Rmb1.2 billion five-year note in January, given that the strict regulation over exchange controls restricts transfers directly from the parent company. This makes locally-denominated bonds offerings a much more useful source of additional funding, Mull notes. The transaction had no problem attracting investors, especially due to its rarity value in the dim sum market.
China has been the world’s largest new car market since 2010 and even though its economic growth is slowing it is still in the fast lane compared to most Western economies. Last year, sales surged 13.9% to 21.9 million vehicles, making it a magnet for automotive companies.
“You need to have a pretty significant presence and sizable investments in China to actually seek funding in the bond markets,” Yves Jacob, Société Générale’s head of DCM for Asia Pacific said to FinanceAsia. “And with large industrial companies like Total, BP and Volkswagen, it does make sense for them.”
Panda bonds
Although only a handful of European firms have launched CNH debt put off by tight regulation, a shallow investor pool and easy funding in the West, China’s gradual capital account liberalisation means that the red tape will disappear in due time thus leading to the rapid growth of its onshore capital market.
A new report from the Australian government-sponsored CIFR said China’s 10-year timeline for liberlisation of its financial system could be accelerated if the current Shanghai free-trade zone experiment is successful. This creates the possibility that the Mainland’s bond markets could be global No. 2 behind the US and equal to that of the entire eurozone, adds the report released on March 26.
In fact, market participants have begun to see signs that Beijing is eager to push the development of its capital markets — currently third largest in the world — via the recent emergence of the so-called Panda bonds or onshore renminbi-denominated notes issued by a non-Chinese issuer.
“As China’s capital controls continue to ease the market anticipates that CNH yields will overtime converge with the CNY onshore market in turn, making the Panda bond market a more realistic competitor in terms of attracting multinational issuers,” Deutsche’s Stephen said.
German luxury carmaker Daimler sold a Rmb500 million note to Chinese investors mid-March, the first foreign corporate bond issue in China’s domestic market. “We are pioneers with this bond issue, and at the same time are helping to open up the Chinese capital market for international issuers,” finance chief Bodo Uebber said in a statement.
The bond, for which Daimler has worked with the Bank of China and the Chinese financial supervisory authority, will be used as a source of funding to bank loans that the MNC has used to refinance a large part of its Chinese business.
Pursuing even a small issue now — be it in the onshore or offshore renminbi bond market — will help firms to familiarise themselves with the regulatory environment, build a name and send an important signal of their commitment to the Chinese market, even though some of these offerings might have to come at a price especially as the publicity novelty gradually wears off, say bankers.
“It might be tempting for European finance directors to view China’s capital markets as a distraction to their day job sourcing billions from the dollar and euro funding markets,” said a London-based country head at a European bank. “However, doing that would risk putting those firms at a long-term disadvantage to more far-sighted foreign rivals.”
