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September 11, 2013

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Home » Business » Finance

Use of cross currency swaps climbs

Source: Agencies | September 11, 2013, Wednesday | Print Edition

Foreign companies are increasingly using cross currency swaps to fund onshore operations in China rather than raising money via the Dim Sum bond market in Hong Kong.

Multinational companies said they could raise more money, more quickly and more cheaply by borrowing in dollars and swapping the money into yuan than if they borrowed directly in yuan through the offshore yuan-denominated bond (Dim Sum) market in Hong Kong.

“We swap from euros into yuan for the maturity we want, which is a very straight forward treasury technique and that means we can have a fixed interest rate loan into China,” said a regional treasury head in Asia at an MNC who declined to be named.

Companies’ growing use of currency swaps means less issuance in the US$80 billion Dim Sum market, especially as the cost of issuing the bonds has risen to become not cheaper than borrowing in China.

Rohit Srivastava, a New York-based executive director at JPMorgan, said it was easier for MNCs to lend to their Chinese subsidiaries in yuan than in US dollars because it was time consuming for subsidiaries to get approval to borrow in dollars.

“Recent yuan liberalization measures have allowed them to take the foreign exchange risks away from the local subsidiary, aggregate such risks at the parent level and then hedge the net exposures using the offshore deliverable or non-deliverable markets,” he said.

Currency swaps are widely used in most Asian countries as a way of accessing local currencies without assuming foreign exchange risk. China is playing catch-up in this regard thanks to gradual regulatory changes.

On July 10, the People’s Bank of China broadened some of its pilot programs, including one that allows companies operating in China to move yuan more easily across borders.

It is also much cheaper for foreign companies to borrow in dollars and swap them into yuan. Rather than borrow in yuan, a company can save 100 basis points in borrowing costs by swapping dollars into yuan and then lending the money as a shareholder loan to its onshore subsidiaries.

It is even more costly for a Chinese subsidiary to borrow yuan in the onshore bank market.

Foreign companies have taken to these currency swaps with gusto. Monthly swap trading volumes have jumped to about US$5 billion from just a few hundred million dollars in early 2012, traders estimate.

 

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