Offshore or on? Three key issues around raising funds in China

China’s renminbi (RMB) has become increasingly important to the world’s trade flows as country’s economy grows in global influence.  That importance will only expand, especially in the wake of the decision out of China’s State Administration of Foreign Exchange (SAFE) to allow foreign investors to trade onshore cash bonds without limitation.

Since the launch of the pilot initiatives in 2010, the RMB is on a path to internationalism and it is one reform the government has signalled will not be altered.

" Cost is a very important decision for all companies... [but] only part of the story. "
Elsa Huang, BlueNotes contributing editor

Chinese businesses are increasingly issuing debt securities in both the onshore and offshore capital markets. Companies have become much more open to different capital raising options, leading to increased participation in the derivatives market as they look to maximise funding.

So what are the main considerations for Chinese companies wanting to look outside the square for financing options?


At a recent Financial Times-ANZ RMB Growth Strategy Series held in Shanghai, an expert panel was gathered to discuss onshore and offshore RMB debt.

The panel consisted of Spring Airlines Chief Financial Officer Chen Ke, ANTA Sports Products Limited Chief Financial Officer Jim Lam, S&P Global Ratings Managing Director & Chief Ratings OfficerCorporate Ratings, Greater China Christopher Lee, Geely Holding vice president and CFO Li Yifan, McDonald’s (China) treasury director Liping Mo and ANZ head of RMB Trading and deputy head of markets in China Patrick Wu.

According to the panellists, cost is a very important decision for all companies when it comes to financing decisions but due the complexity of the Chinese financial system and volatility of the FX market, cost is only part of the story.

Chinese companies are learning to choose the most appropriate fundraising solutions for their own business model and the market.

According to the panel, the main points to consider include:

• The intuitive purpose of raising the debt

If companies plan to issue debt in China but use the money to support overseas expansion (such as M&A activity or building an oversea franchise), required relevant government approvals are likely to increase administration costs.  However, if debt is issued offshore to support growth inside China, the admin costs will differ.

• The risk of FX

Previously Chinese companies which imported production materials (such as iron, steel and oil) enjoyed the benefits of an appreciating RMB. It was easy to ignore FX risk and not pay attention to hedging.

But as several companies suffered from FX volatility over the past few years, this is now a new area companies are looking into - and picking up quite quickly.

• The difference between the onshore and offshore rating mechanism

As rating mechanisms and accounting rules differ greatly between offshore and onshore raising, a lot of non-state-owned Chinese companies find it hard to get a favourable rating in the offshore market.

It takes time for local companies to attract and develop their own talent familiar with rating and accounting rules overseas. This increases costs and uncertainty for those with lower awareness of overseas markets, according to Spring Airline’s Chen.


Elsa Huang: Thank you for talking to BlueNotes. As we know, the PBOC has allowed foreign investors to enter the inter-bank bond market recently. With this policy, will RMB financing costs be reduced in the onshore bond market?

Chen Ke: Given the rich liquidity conditions in China since last year, the PBOC has eased monetary policy in a successful bid to boost the bond market.

In this context, Chinese companies will have one more financing channel in the domestic bond market besides bank loans, IPO and debt or equity issuing in overseas markets.

Thanks to the policy and continued monetary easing, it will provide a better financing channel with a number of companies looking for new or replacement capital.

Huang: There are two markets to be considered for RMB financing – onshore and offshore. As a CFO, what are the key factors you consider when to choose between the two, on top of cost?

Chen: The first one I consider is the purpose of the financing. For an airline company, we raise money to buy new planes overseas; there is no difference for us to do financing in onshore or offshore markets.

The both-way financing models have no impact on our business as in onshore markets we can get official approval from National Development and Reform Commission, depending on our complete background in trade for foreign exchange purchases.

For overseas payments and in offshore markets, it will be more convenient for us to issue bonds as we can pay Airbus directly.

The second factor is exchange fluctuations. We hope that the RMB can cover all capital expenditure and replace existing debt with US dollars and other foreign currencies from our own perspective.

When issuing bonds, we prefer RMB settlement but will still need to compare the cost. Currently, the financing cost onshore is superior to offshore.

The third one is the credit rating of the bond. For the whole airlines industry, it will increase the bond cost if we get the rating in offshore market.

As the overseas rating mechanism differ greatly from our domestic markets it is difficult to get a good rating overseas. But in China we get better recognition.

Those are my other considerations for financing, but the most important factor is still cost.

Huang: The RMB internationalisation discussion has gone on for a long time. What is your opinion on and the implementation of other financial reforms?

Chen: The RMB internationalisation has been continuing to move ahead since the PBOC introduced the policy two or three years ago. Although the process has been affected by the exchange rate, the main direction is still positive.

We established a cross-board RMB cash poll last year, which plays an important role for RMB inflow and outflow and our management of capital liquidity and risk control. We can get better opportunities and products by for hedging the risk and improving our revenues.

With the increasing status of the RMB, it will be helpful for companies getting income dominated in RMB to do business with vendors, in terms of payment and settlement.  I believe it will be a trend for major airline manufacturers, to accept the RMB settlement in the next few years.

Elsa Huang is a contributing editor at BlueNotes

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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