Yuan outflow limit to hit smaller Chinese firms but seen temporary

Curbs may make it difficult for smaller mainland firms to buy commercial property in Hong Kong, other markets

PUBLISHED : Thursday, 01 December, 2016, 10:58pm
UPDATED : Thursday, 01 December, 2016, 11:04pm

The Chinese central bank’s move to limit and tighten scrutiny on yuan outflows via lending to offshore entities may make it more difficult for less established mainland firms to buy offices or expand in Hong Kong and other countries, analysts said.

Some analysts, however, expect the policy to be relaxed after the yuan value, which has depreciated substantially against the US dollar, stabilises.

“We believe that this move was issued primarily to stabilise the yuan ... it is probably temporary and may be relaxed once it stabilises,” said Thomas Dillenseger, senior director of Alvarez & Marsal, a business consultancy firm.

But the stringent approval process will also cause significant delays to yuan fund transfers, he added.

The People’s Bank of China, China’s central bank, on Tuesday asked banks to restrict non-financial mainland firms’ yuan fund transfers in the form of lendings to offshore entities. Among the new norms are the criteria that lenders must have been registered for at least a year and can only lend to overseas companies in which they have a shareholding, subject to a cap equivalent to 30 per cent of their shareholders’ equity. In addition, the loans also need to be supported by valid commercial reasons and must be repaid as per schedule.

Bureaucratic hurdles have already caused a temporary suspension in some inter-company yuan fund transfers of at least one firm contacted by the Post, pending more paper work.

“We can’t transfer money, either in yuan or in US dollar, to our subsidiaries overseas at this moment,” said a staffer at a large state-owned firm who is responsible for cross border transactions, who asked not to be named since she is not authorised to speak to the media.

Since the new rule took effect on Wednesday, she said local banks have been discouraging them to conduct any capital account cross-border transactions, for example, for overseas debt repayment, despite having set up intra-group yuan cash pools on both sides of the border.

“They want the money to come back, so you have to prove your cash pool will have net yuan inflows in the end,” she added.

Hong Kong-based developer Far East Consortium International chairman David Chiu said the policy could dampen mainland firms’ property investments in Hong Kong, while property consultancy JLL’s head of capital markets Joseph Tsang expects the move to affect mainland firms without offices in Hong Kong or overseas and want to buy one.

Tsang said established mainland firms may not be affected much as they have access to offshore fund-raising channels for the capital needed to finance their overseas expansion.

Beijing began tightening cross-border flows of yuan several months ago amid an accelerating net capital outflow that hit 2 trillion yuan (HK$2.3 trillion) in the first 10 months of this year, according to business executives.

“It was believed that a large portion of the money going out was used for hedging currency volatility rather than for investments or trade,” said Wang Feng, chairman of Shanghai-based investment bank Ye Lang Capital.

“Banks that granted yuan loans to mainland companies’ offshoots outside the mainland have failed to effectively monitor the use of the funds due to the lack of regulatory mechanisms.”

Chong Lub-bun, a director with C Consultancy that advises on Chinese companies’ overseas acquisition deals, told the Post the curbs might not be a long-lasting one given the timing of its issuance.

“The yuan has been touching its multi-year lows and the liquidity is tightening at this point in time,” he said. “Chances are that when things get better, the regulations can be loosened.”

Additional reporting by Daniel Ren and Celine Ge