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Thread: early weekend commentary - US companies begin to finance directly in China

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    Default early weekend commentary - US companies begin to finance directly in China

    (snip)Aug. 19 (Bloomberg) -- McDonald’s Corp., the world’s largest restaurant chain, became the first foreign non-financial company to sell yuan-denominated bonds in Hong Kong.

    McDonald’s, based in Oak Brook, Illinois, sold 200 million yuan ($29 million) of 3 percent notes due in September 2013, sale manager Standard Chartered Plc said in an e-mailed statement today.

    The sale “opens up more potential issuers to tap this market, especially those who have sizable operations in China,” said Arthur Lau, a Hong-based fixed-income fund manager at JF Asset Management Ltd.

    China is expanding its financial system, and will use Hong Kong as a testing ground for yuan products, according to the city’s former central bank chief Joseph Yam. Foreign companies in February became eligible to issue yuan-denominated bonds as part of efforts to bolster the ex-British colony’s financial status and expand its role in promoting China’s currency for global commerce.

    Liam Jeory, Hong Kong-based McDonald’s spokesman, said he couldn’t immediately comment. He said the company plans to issue a statement.

    Bank of East Asia Ltd. and HSBC Holding Plc’s China unit sold yuan bonds in Hong Kong in 2009, becoming the first overseas banks to do so, according to data compiled by Bloomberg. Hopewell Highway Infrastructure Ltd., controlled by Hong Kong billionaire Gordon Wu, was the first non-financial company to enter the market when it issued 1.38 billion yuan of 2.98 percent notes in July, the data show.

    Hopewell’s bonds were last quoted at a 2.868 percent yield, according to Hong Kong Treasury Markets Association prices.

    U.S. Retailers

    Wal-Mart Stores Inc., the world’s largest retailer, said in March that it may sell yuan bonds in Hong Kong. An issue would underscore the company’s commitment to support local communities and China’s financial system, Asia Chief Executive Officer Scott Price said in an interview. (snip)


    Why should you care if US companies no longer go to Wall St and no longer finance their capital improvements / expansioms in US dollars ? Well, arguably, corporate bonds and their interest payments are one of the few mechanisms by which the US economy can grow in terms of 'real' value. And, arguably, the (former) use of the US dollar for such corporate financing was a major reason that US companies remained officially 'based' in the US and performed their corporate accounting in US dollars.

    If McDonalds, WalMart etc. are beginning to look at their US operations as just one more component of a global business ... which this yuan bond sale implies ... this could be the beginning of a 'game changer'.

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    Default Re: early weekend commentary - US companies begin to finance directly in China

    This more reflects how frozen the US credit markets remain. MCD by all objective measures should be an easy credit risk. But, they apparently cannot go into the US credit markets and get the kind of money they need. Remember, MCD has a about $1.6 billion in cash on hand and a $2 billion capital budget. Now, they will realize about $4 billion in profit this year. Thus, they could finance their capital budget from cash flow. But, shareholders like their dividends.

    The problem is US banks are keeping bad debtors afloat and not making loans to good debtors.

    HTH
    Z

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    Default Re: early weekend commentary - US companies begin to finance directly in China

    ^^^ I'll obviously agree with you that US credit markets aren't being particularly helpful to private sector businesses right now. But as you also point out, MCD is about as good as it gets in terms of credit risk !!! For that reason alone I'm still leaning toward a theory that MCD's reasons lie elsewhere.

    Obviously, when a US corporation structures its debt in currencies other than the US dollar, and particularly so when that other currency is from a country where that US corporation is earning a lot of new profits, this smacks of an effort to avoid the need for 'repatriation' of those profits back into the US !!!

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    Default Re: early weekend commentary - US companies begin to finance directly in China

    and it gets even 'better' ...




    (snip)"A number of the world’s biggest banks have launched international roadshows promoting the use of the renminbi to corporate customers instead of the dollar for trade deals with China.

    HSBC, which recently moved its chief executive from London to Hong Kong, and Standard Chartered, are offering discounted transaction fees and other financial incentives to companies that choose to settle trade in the Chinese currency.

    “We’re now capable of doing renminbi settlement in many parts of the world,” said Chris Lewis, HSBC’s head of trade for greater China. “All the other major international banks are frantically trying to do the same thing.”

    HSBC and StanChart are among a slew of global banks – including Citigroup and JPMorgan – holding roadshows across Asia, Europe and the US to promote the renminbi to companies.

    The move aligns the banks favourably with Beijing’s policy priorities and positions them to profit from what is expected to be a rapidly growing line of business in the future.

    The phenomenon will accelerate Beijing’s drive to transform the renminbi from a domestic currency into a global medium of exchange like the dollar and euro.

    Chinese central bank officials accompanied StanChart bankers on a roadshow to Korea and Japan in June. The bank held similar events in London, Frankfurt and Paris.

    Lisa Robins, JPMorgan’s head of treasury and securities services for China, said there had been a “spike in interest” from international clients.

    An increasing number of Chinese companies have been asking foreign trading partners to accept renminbi as payment, said Carmen Ling, Hong Kong head of global transaction services at Citi.

    BBVA, Spain’s second-biggest bank, is also drawing up plans for a global marketing campaign that will focus on Latin American companies that export to China.

    Banks started establishing renminbi trade settlement operations in mid-2009, when Beijing introduced a pilot scheme allowing companies to use the renminbi for trade outside China.

    The scramble has intensified in recent months as Beijing has substantially expanded the scheme – from a handful of Asian countries to the whole world – and introduced other liberalisations to its currency regime."(snip)

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    Default Re: early weekend commentary - US companies begin to finance directly in China

    chapter 2 ...



    (snip)"Sept. 8 (Bloomberg) -- China and Russia plan to start trading in each other’s currencies as the world’s second-biggest energy consumer and the largest energy supplier seek to diminish the dollar’s role in global trade.

    China may start trading its currency against the ruble within weeks, three bankers with knowledge of the matter told Bloomberg, and sent out a document last week allowing lenders to apply for ruble trading licenses, one of them said. Russia’s Micex Stock Exchange is making preparations to trade the ruble against the yuan in an initiative that has the backing of the country’s central bank, Ruben Aganbegyan, the head of the bourse, told reporters at a conference in Moscow today.

    “Given the risk to the dollar and U.S. assets from their fiscal position they want to reduce their dependence on the dollar as an invoicing currency,” Bhanu Baweja, global head of emerging markets fixed income, currency and credit research at UBS AG, said in a phone interview from London. “It makes sense for two large economies to exclude a third, overly dominant economy from their trading equation.”

    In the wake of the global financial crisis, which forced the U.S. economy into recession, both China and Russia have called for the dollar’s role in the financial system to be diluted. Volatility in major currencies is putting the global recovery at risk Zhang Ping, the head of China’s National Development and Reform Commission, said last month. President Dmitry Medvedev last year suggested Russia, holder of the world’s third-largest foreign-currency reserves, reduce its holdings of dollar."(snip)

    (snip)"“Gradually the dollar is being eliminated from the foreign-trade settlement flows,” said Dariusz Kowalczyk, a Hong-Kong based senior economist at Credit Agricole CIB. “People are beginning to trade Asian currencies without intermediation via the dollar.” (snip)


    Keep in mind that the current use of the US dollar for international settlements creates a fairly strong demand for US dollars that will suddenly cease to exist if settlements start to occur directly between two foreign currencies. Also keep in mind that reduced international demand for US dollars will mean a devaluation of the US dollar's exchange rate ( with associated higher prices for all world market commodities ). And did I mention that US financial houses who presently skim fees from international settlements via the US dollar will immediately be cut out of the picture if foreign financial houses can settle directly ?

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