CNH Tracker-Stock connect scheme reduces dim sum issuers'costs

Thu Nov 20, 2014 2:37am EST
 
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By Saikat Chatterjee

HONG KONG Nov 20 (Reuters) - The launch of the Shanghai-Hong Kong stock connect scheme this week has reduced borrowing costs for foreign companies looking to issue yuan-denominated debt in the offshore markets and may lead to more issuance in an already record year.

A link that lets Hong Kong and Shanghai investors buy and sell shares on each other's bourses debuted on Monday, boosting hopes of more capital flows into equities as investors rush to find bargains in the bourses.

But while stock punters have met with early disappointment as both Hong Kong and Shanghai stocks lost some of their pre-launch gains, foreign issuers of offshore yuan debt are licking their lips at the prospects of cheaper borrowing costs.

Expectations of a shortage of the Chinese currency in Hong Kong had risen in recent months making it increasingly expensive for yuan borrowers as foreign investors can only participate in the stock connect scheme using the yuan.

That rise in the cost of offshore yuan has, owing to the widening interest rate gap with the U.S. dollar, driven up the cost of swapping dollars for yuan in the currency forwards.

Those looking to borrow yuan by swapping their dollars now have to pay a record 3 percent for one-year FX swaps , three times the rate in February.

This jump in swaps however benefits those that are on the opposite side of the FX swap trade, which is foreigners who are borrowing in the offshore yuan market and swapping that yuan into dollars.

This week has seen issuance in the dim sum market by new South Wales Treasury Corporation and Caterpillar.   Continued...