McDonald’s is first non-financial foreign company to issue yuan-denominated bonds; other MNCs are sure to follow.
Looking to locally fund its expansion in China, McDonald’s became the first Western non-financial company to issue yuan-denominated bonds. This is sure to attract other Western MNCs, who in February became eligible to issue yuan bonds.
To be sure, McDonald’s issuance of 200 million yuan (or $29.5mn) in three-year notes in Hong Kong was pretty paltry; the company said in a statement that the money would go towards opening 175 new restaurants in China this year. But the issuance is likely a sign of better (easier?) days ahead for companies doing business in China. It also has PR value for the company, especially in the eyes of those within China and elsewhere who would like to see the yuan grow as a funding currency.
This latest opening of China’s bond market – foreign financial companies have been able to issue for about a year – is part of the country’s plan to promote its currency for global commerce. It also follows promises by Beijing to open up its capital markets. But for foreign non-financial companies with growing business in China, it offers a new way to not only fund major investments in a country where intercompany lending is severely limited, it’s also a way to hedge against the yuan, which is sure to appreciate in the years ahead.
Tricky business
Due to a variegated regulatory environment, strict banking limitations, government restrictions and sometimes differing provincial rules, funding a company’s operations in China has always been a tricky proposition for Western MNCs. And it has been a particular challenge for treasury given that they are on the front lines in dealing with the ins and outs of these challenges, particularly banking relationships and the types of bank accounts a company must have in order to fund operations. The myriad of required bank accounts – basic and general (for local currency needs) and current and capital (for foreign currency applications) – are enough to drive any treasurer mad.
But this could all change as more companies begin issuing in yuan and the liberalization of China’s financial system continues. At some point, to become a global capital markets contender, China will need to open its bond market sufficient to make it more than a niche funding option for local currency working capital—and issues of billions not millions. Along the way, the numerous institutions that make up China’s evolving and, in places, fragile, banking system will need to figure out how to better serve MNCs and compete on a more open stage. Who will lose out if a robust local bond market takes root?