12/02/2017 08:36 AST
nks in Hong Kong are finding a new source of revenue in helping multinational companies deal with a growing headache: how to cope with tightening restrictions on transferring profits and dividends out of China.
As Beijing clamped down on outflows that threatened to destabilise its currency, companies are suddenly turning to lenders in Hong Kong to hedge their currency risks, bolster the yield on money trapped inside China and for new loans, according to bankers and analysts.
“Our dialogue with clients now is all about how to manage their trapped cash,” said Carmen Ling, who oversees Standard Chartered’s global yuan business. “More multinationals are finding it difficult to move their money out of China.”
The swelling pile of cash trapped in China is breathing life into Hong Kong’s yuan banking business, which had been languishing since the mainland government accelerated its attempts to devalue the Chinese currency starting in August 2015. China-generated profits of foreign industrial companies, including those based in Hong Kong, Macau and Taiwan, rose 12% last year to a combined 1.74tn yuan ($253bn), according to the statistics bureau.
While predominantly targeted at speculative outflows, China’s clampdown has also caught up foreign firms. They are now required to provide materials including tax documents, financial statements and board resolutions to banks if they plan to remit more than $50,000 in profits from direct investments in China back to their countries, the State Administration of Foreign Exchange said last month.
In one sign of the disruption caused by the new rules, the European Union Chamber of Commerce in China said it expressed concerns at a January meeting with Chinese officials about the difficulty some companies were facing moving their profits out of the country. SAFE head Pan Gongsheng reassured the gathering that China doesn’t restrict the remittance of profits by foreign companies and will support any outbound investment that complies with the rules, the regulator said in a statement after meeting the EU chamber. SAFE didn’t immediately respond to a faxed request for comment.
With most analysts predicting further weakness in the yuan, which fell 6.5% against the dollar last year, companies are moving to hedge their exposure. While there aren’t any estimates for the value of hedging services, trading in over-the-counter currency options in the offshore yuan against the dollar have surged – a sign of rising demand for hedging tools, Hong Kong’s stock exchange says. The average global daily turnover of options tied to the dollar and offshore yuan soared to $18bn last year from $30mn in 2010, data provided by the bourse show.
Australia & New Zealand Banking Group bought Australian dollars against the yuan to hedge the expected proceeds from the sale of its stake in Shanghai Rural Commercial Bank Co, a deal valued at A$1.84bn ($1.4bn), spokesman Stephen Ries said in early January. ANZ has no concerns about its ability to access the proceeds of the sale, Ries added.
“Client demand for RMB hedging and structured deposits is increasing, and this is where foreign banks are much more active,” said Kun Shan, Shanghai-based head of local market strategy at BNP Paribas (China) Ltd, using an abbreviation for the renminbi.
Jonathan Koh, a Singapore-based analyst at UOB-Kay Hian Holdings Ltd, said increased demand for hedging will provide “a good future source of income for the banks.” Still, the impact on earnings so far has been limited, he said.
Companies are also turning to the banks for services that help them generate higher returns on trapped yuan, Standard Chartered’s Ling said. One popular offering is structured deposits, which typically involve an investment component such as equities. Such products offer higher potential yields than traditional deposits while protecting the principal, according to the bank.
Some companies, especially
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