As currencies of developed nations struggle to maintain supremacy in global financial markets, the yuan is finding favour with Indian firms. Despite the partial convertibility clause, the Chinese currency is fast gaining popularity as an alternate source of fund raising by India Inc.
The demand for yuan-denominated funds in the country, along with the growing Indo-China trade, is clearly reflected in the government's decision to allow fund raising up to $1 billion in the currency.
According to bankers, power and infrastructure companies are showing great interest, mostly due to the purchase of equipment from Chinese manufacturers. Infrastructure and power companies usually have projects with long gestation periods, and longer tenor debt is preferred, they said.
Brijesh Mehra, head (corporate and investment banking), India, RBS, said, “Yuan fund raising would be very attractive to quality companies that have a fixed-funding programme and do not want to wait for the liquidity of the euro-dollar market to return.” Also, firms who have exposure in China would find this useful, as exchange risk would be mitigated, he added.
Banks in China are also keen on funding the growing appetite for the renminbi across the border. “If there is a demand for yuan-denominated funds from Indian companies, we would provide them the service, in accordance with the regulations,” said Yang Kaisheng, president, Industrial and Commercial Bank of China. He added the yuan was appreciating, and companies may like to hold on to yuan funds.
Last week, R Gopalan, economic affairs department secretary in the finance ministry, said, “For the first time, we are taking the yuan as a currency. There will be a limit of $1 billion to begin with. It is within the $30-billion limit. Many companies sought the yuan as one of the currencies for overseas debt,” he said. If there is a requirement for additional money under ECB (external commercial borrowing route) for infrastructure, we will consider it, the finance secretary had said.
The yuan appreciated about five per cent against the dollar, compared to 2010. With the downgrading of US sovereign debt rating and the crisis in the euro zone, analysts feel within a few years, the yuan may become a currency of choice. Institutional investor may look at raising money through yuan-denominated bonds. “The yuan is also a cheaper source of funding,” said Ajay Manglunia, head of fixed income markets at Edelweiss.
China's prevailing lending rate is still about 200 basis points lower than that in India. “Lower yield on yuan-denominated bonds allow lower liability in an appreciating currency,” said the global capital markets head of another foreign bank.
Amid the euro zone crisis, the yuan scores another point over the euro, which is fast depreciating against it. On the other hand, the shortage of the dollar in the global financial system, owing to risk aversion, is supporting the yuan's global demand. “Fund raising in the yuan would allow Indian firms to find alternate sources of funds to compensate for the liquidity crunch, due to the euro zone crisis,” said Alok Singh, head (fixed income and structured products), BNP Paribas.
While yuan fund raising would be lucrative, merchant bankers say loans would be preferred over bonds, due to the lower withholding tax and longer tenors. Most of the fund-raising in yuan is likely to be carried out through loans.