Beijing's decision to allow the use of the yuan in foreign direct investment (FDI) is expected to herald a new era in the internationalisation of the currency. Even the current market volatility is not expected to have a big impact on companies issuing more yuan-denominated bonds and shares as investors bet on the ongoing appreciation of the currency. The liberalisation of the yuan, one of 30 measures announced by Vice-Premier Li Keqiang during his three-day visit to the city earlier this month, means that from as early as September, foreign companies will be allowed to invest their yuan holdings directly into mainland projects. That will help reduce currency risks for companies, as their projects are on the mainland, and it makes sense for them to use the yuan instead of the US dollar. The measures are also aimed at boosting yuan trading in Hong Kong. Foreign companies last year pumped in US$105.7 billion worth of FDI to the mainland, 57.3 per cent of it from Hong Kong. Now that companies can use the yuan to invest directly on the mainland, more are expected to issue 'dim sum' bonds - yuan-denominated bonds issued in Hong Kong - or yuan-denominated initial public offerings and share placements. Joseph Tong Tang, executive director of Sun Hung Kai Financial, said companies had been reluctant to issue yuan-denominated bonds or shares as the mainland's capital controls mean they were unsure if they could repatriate money back to the mainland. 'The new FDI rule would remove these worries and encourage them to issue yuan-denominated bonds or yuan-denominated shares,'' Tong said. Regardless of the market's present volatility, Tong said yuan-denominated stock or bond offerings would still be favoured by investors as they bet on the rising value of the currency, which has gained over 20 per cent against the US dollar since 2004. The first yuan-denominated IPO in Hong Kong, however, had a less than stellar market debut. Hui Xian Real Estate Investment Trust, a spin-off of tycoon Li Ka-shing's Beijing Oriental Plaza, dropped 9.35 per cent on its debut in April. So far, no non-reit yuan-denominated share offering have been launched. Yuan-denominated bonds have had a better start, with 49.6 billion yuan (HK$60.4 billion) worth of 'dim sum' debt issued in the first seven months this year, compared with 35.8 billion yuan last year as a whole. Mike Wong Ming-wai, chief executive of the Chamber of Hong Kong Listed Companies, said companies were interested in issuing yuan-denominated bonds and shares. 'The Chamber and the HKEx is organising a seminar about yuan-denominated share offerings and the response from listed companies is very strong,'' Wong said. 'Companies are interested in understanding more about the mechanisms.' Wong said companies that have existing operations on the mainland use the yuan as operating cash anyway. 'Should they need further investment or expansion, the need for yuan is even stronger,'' Wong said. 'Even for companies that don't have existing operations, they too can make investment projects with the yuan directly, rather than raising US dollars and converting the funds into yuan. This will do away with the exchange rate risks at a time when the yuan is so strong.' Wong said the market volatility would not deter companies from raising funds for yuan-denominated bonds or shares. 'Compared to the rest of the world, China remains a relatively strong economy and still offers growth opportunities in a comparatively safe environment,' Wong said. 'So if a company has a strong Chinese investment story to tell, investors should be willing to subscribe to its yuan offering when alternative choices are limited.' Bernard Chan, president of Hong Kong-listed insurer Asia Financial Holdings, said his company might consider a yuan-denominated bond or share offering when opportunities arise. 'All in all, it will depend on whether a profitable investment is identified and the cost of funding from a yuan-denominated bond issue,'' Chan said. Chan said besides yuan-denominated bonds or shares, yuan-denominated loans may be another option to consider. 'It is expected that once the yuan FDI is in place, those Hong Kong banks with yuan-denominated retail deposits will offer yuan-denominated term loans to their customers,'' Chan said. 'In view of the current low yuan-denominated deposit rate, the lending rate for offshore yuan may not be too high. It may be cheaper for Asia Financial Holdings to consider one-year yuan-denominated term loans than having a private placement of yuan-denominated bonds.' However, Chan said if his company has a longer-term funding need, then a yuan-denominated bond may be a good option as it will have an advantage of offering a longer financing term at a pre-fixed rate than the shorter-term banking facility. Besides Hong Kong companies, Mark Konyn, chief executive of asset management firm RCM Asia Pacific, expects international companies and financial institutions to tap the offshore yuna-denominated bond market in a significant way as the market expands. Konyn said the current market volatility would mean yuan-denominated bonds would be more popular than yuan-denominated shares. 'Short-term volatility makes pricing more difficult although the current indication is that there is healthy interest,' Konyn said. 'Yuan-denominated bonds will likely attract more attention as equities remain volatile in the short term. The IPO pipeline in general remains fairly strong and the key challenge for equity issuers is overall confidence and market sentiment.'' $69.2b Is the amount of foreign direct investment, in US dollars, on the mainland between January and July, up 18.6pc from a year ago
