Qianhai cross-border yuan loan program officially starts

Fifteen Hong Kong-based banks provided 2 billion yuan in loans to 15 companies registered in the Qianhai district of Shenzhen on Jan. 28, marking the official start of the Qianhai cross-border yuan loan program as well as greater capital account openness and further interest rate liberalization.

Greater capital account openness

The Hong Kong branches of the Bank of China and HSBC Holdings as well as 13 other lenders signed 26 loan contracts worth 2 billion yuan with 15 Qianhai-based companies, including Shenzhen Qianhai Development and Investment Holdings Company. Since the Interim Measures for Management of Qianhai Cross-Border Yuan Loans was released on Dec. 27 last year, when overseas yuan loans will be officially approved to be granted to domestic firms has attracted extensive attention from domestic and overseas banks and companies.

According to the interim measures, the cross-border loans should be mainly used to promote Qianhai’s construction and development in line with related state policies.

“Although Qianhai is just a pilot zone, it is enough to show that China has taken one more solid step toward greater capital account openness,” Sun Maohui, director of the Center for Financial Engineering under Shanghai Normal University, said in an interview with International Finance News.

“The official start of the Qianhai cross-border yuan loan program has opened a new channel for the backflow of overseas yuan funds, which will increase the yuan’s global liquidity and promote its internationalization.”

Liu Linan, a senior strategist for greater China at Deutsche Bank AG, said that previously, cross-border yuan loans were short-term. This was the first time that overseas banks were allowed to provide medium- to long-term loans. The Qianhai cross-border yuan loan program will promote the development of the yuan backflow mechanism.

The program’s impact on offshore yuan pool depends on the pace and size of yuan backflows. Market analysts said that the program may accelerate the backflow of offshore yuan funds, thereby placing offshore yuan markets under certain pressure. However, the amount of yuan backflows will not be sizable in the early stages due to various restrictions on the recipients and usage of the Qianhai cross-border yuan loans, Liu said.

Interest rate liberalization accelerated

The interest rates on the Qianhai cross-border yuan loans have attracted particular attention. Although the specific interest rates were not revealed, sources said the interest rates were determined by both the lenders and borrowers and were lower than the average loan interest rate in the Chinese mainland.

At present, the Chinese mainland’s benchmark one-year lending rate is 6 percent, and specific lending rates may fluctuate according to the credit rating and mortgage status of loan applicants. Domestic companies which have a good credit rating and great financial strength can enjoy a lending rate as low as 5.4 percent, but the interest rate on yuan loans in Hong Kong is only around 4 percent. Therefore, many mainland companies have turned to Hong Kong for financing in recent years.

“The level of interest rates on the Qianhai cross-border yuan loans is likely to be between that of the Chinese mainland and Hong Kong, which explains why so many Hong Kong banks are greatly interested in the program.

As more banks and companies participate, the interest rates on the Qianhai cross-border yuan loans will become more flexible and better reflect market conditions,” a senior executive at a foreign bank told International Finance News.

Read the Chinese version at: 前海跨境人民币贷款开闸, Source: International Finance News, Author: Fu Bilian