Chinese firms looking beyond dollar financing after yuan devaluation
Corporate treasurers look to reduce currency exposure when raising funds overseas as yuan is fixed higher against dollar for second day
The central bank on Monday set the yuan higher against the US dollar for the second day as the drastic volatility of the currency seen last week pushes more mainland companies to raise part of their funds through yuan debt at home rather than US dollar offshore in order to minimise foreign exchange uncertainties.
Apart from diversifying their currency exposure, corporate treasurers using dollar financing as their major fundraising channel are hedging their debt more than before following last week's unexpected devaluation.
According to HSBC, mainland companies have US$1.7 trillion of outstanding debt. When the yuan devalues, companies earning in that currency must generate more income to refinance or clear their dollar debts.
Christopher Lee, a managing director of greater China corporate ratings at Standard & Poor's, said the devaluation could potentially lead to a change in the fundraising behaviour of many companies on the mainland.
"Given what happened in the past week, issuers will have to consider different options, including onshore markets," Lee said. "For example, the onshore bond market has become active for property developers and other industrials to raise funds. They could actually offer lower cost, same maturity with no currency risks.
"The opening up of the onshore bond market to more issuers will provide another channel for corporates to refinance their debt, including offshore US dollar debt.
"However, it is a fairly small amount that has been raised by corporates in the onshore market.
"We would expect it to take a significant amount of time to refinance the US$1.7 trillion outstanding offshore bond."
China Vanke, the mainland's largest property developer, said yesterday it would consider more hedging when raising funds overseas.
The company would also explore domestic and overseas borrowing channels to minimise risks.
Beijing started to approve domestic debt issues by property companies last year, reopening the fundraising avenue after five years.
Increased volatility in the yuan is actually good for the health of the foreign exchange market, according to Paul Gruenwald, the managing director and chief economist of Asia Pacific at S&P.
"One of the challenges facing China now is that we need volatility in order for the hedging market to develop," Gruenwald said. "We want firms and banks to be able to hedge their currency exposures but they can't do that until the market volatility picks up. It's kind of the chicken-and-egg problem.
"We are going to see how much intraday volatility will be allowed by the authorities."
The yuan held steady against the dollar on Monday on a firmer official midpoint fix, pointing to continued efforts by the central bank to calm frayed nerves after last week's surprise devaluation sliced 3 per cent off the currency's value.
The People's Bank of China set the midpoint rate at 6.3969 per dollar before the market open, 0.05 per cent firmer than Friday's fix of 6.3975. The onshore yuan spot rate settled at 6.3946, stronger than the daily fix but 0.05 per cent weaker than Friday's close of 6.3912.
