Foreign firms fuel inland operations in China via cross currency swaps - observers

By Rizza Sta. Ana

Sep 10, 2013 03:37 AM EDT

Foreign companies were observed to have been using cross currency swaps as of late to fund their operations in mainland China.This practice was reportedly becoming popular because foreign firms could raise more money in less time and is less expensive rather than raising money in Hong Kong's Dim Sum bond market. 

A regional treasury head for a foreign firm based in Asia had said about the practice, "We swap from euros into renminbi for the maturity we want, which is a very straight forward treasury technique and that means we can have a fixed rate interest loan into China." He requested to speak on anonymity as he was not authorized to speak to the press.

The USD80 billion Dim Sum market has been feeling the decrease in currency swaps. Issuing Dim Sum bonds were now becoming costlier than borrowing in dollars because of less demand. Borrowing in dollars would allow foreign firms 100 basis points savings and assumes no risk in foreign exchange.

New York-based executive director Rohit Srivastava at JPMorgan said about the phenomenon, "Recent yuan liberalization measures have allowed them to take the FX 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."

As China has eased up its regulations, foreign companies were now taking this less costly, cheaper alternative funding with gusto. Traders had estimated that monthly swap trading volumes rose from a few hundred million to around USD5 billion early last year. However, market strategists argued that if big savings would be the denominator, foreign firms could get additional funding by using longer-maturity tenor swaps. 

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