Overseas financing costs for Chinese firms exceeding financing at home – PBOC

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Overseas financing costs for Chinese companies continue to rise and are exceeding the cost in China’s onshore market, after shifting monetary policy by several countries’ central banks and tightening offshore yuan liquidity, according to research by the People’s Bank of China (PBOC).

Carried out by the PBOC in tandem with a number of its branches and major Chinese commercial banks, the research found that the appeal of overseas financing has waned significantly as the difference between domestic and foreign interest rates continues to narrow. Though property developers and local governments with strong capital needs continue to look abroad for funding.

The cost of a one-year US dollar loan is basically above 2.9 per cent and more than 4.35 per cent overall if the cost of forward settlement and sale of foreign exchange and domestic guarantee fees are factored in, the PBOC’s report shows. There is no difference in financing at home or abroad and firms are taking a wait-and-see approach on overseas financing.

Despite the high cost of overseas bond issuance, Chinese local government financing vehicles (LGFVs) and real estate developers still have large offshore financing needs and are relatively more tolerant of costs. Some developers’ see coupon rate on their US dollar financing exceed 13 per cent, which is higher than the cost of issuing trusts in China, according to the study.

Local government financing vehicles and property developers often lack overseas repayment sources and dollar positions and have to bear certain forward settlement or sales costs and face greater policy risks. Also, with various intermediary service fees, the cost of issuing bonds overseas is high. Still, they are forced to turn to abroad because they often don’t have domestic financing channels and are constrained by too much debt and tight capital chains.

On the other hand, the yuan’s offshore interest rate has moved higher together with rising financing costs since August due to tighter yuan liquidity in the offshore market, making the yuan’s overseas financing higher than that in China.

A survey conducted by a branch of the PBOC shows that the overall cost of a one-year yuan loan from a Chinese-funded bank’s overseas branch is between 5.16 per cent and 6.36 per cent, slightly higher than 5.07 percent to 6.22 percent at home.

That means few quality customers of domestic banks borrow yuan abroad, and the scale of overseas yuan financing has dropped significantly. Cross-border yuan loan inflows have fallen to 243.1 billion yuan – 466.9 billion yuan in the first half of last year, according to the RMB Cross-border Payment & Receipt Management Information System.