* Yuan debt about 80-100 bps cheaper than HKD debt

* Appreciating yuan means companies have to repay more

* Lack of repatriation options slows growth

* Need for reliable benchmark rate to plot yield curve

By Kelvin Soh and Michelle Chen

HONG KONG, July 30 (Reuters) - Companies are eager to issue
yuan debt in Hong Kong to take advantage of lower borrowing
costs, although expectations of a rise in the currency and
capital controls may get in the way of an offshore market.

When Hong Kong signed an agreement with Beijing to allow
companies to trade freely in the yuan in the territory and to
open yuan accounts, many market participants expected a flurry
of new bond issues.

The interest rate differential between yuan and Hong Kong
dollar bonds is about 80-100 basis points, and has widened in
the past months as investors chase the limited number of yuan
bonds on expectations of currency gains.

However, if these borrowers lack revenues in yuan, the cost
of hedging would increase their financing costs. Infrastructure
firm Hopewell, which was the first company to issue yuan bonds
in Hong Kong this year, was able to get around that because a
large share of its revenues is in yuan.

"The trend now is to hold yuan assets, not issue yuan
debt," said Paul Tang, chief economist at Bank of East Asia.
"Owing debt in yuan means you'll have to pay back even more
when it's due, and that's not a good thing when you don't even
know how much it's going to appreciate by."

Issuers typically limit the tenure of yuan bonds to two to
three years to limit their foreign exchange risk.

One-year non-deliverable forwards are at about 6.68 yuan to
a dollar, meaning the market expects the currency to appreciate
over 1 percent in a year.

This is to say that if Hopewell did not have a natural
hedge by way of yuan revenues, it would have ended up paying a
coupon of 3.98 percent, factoring in currency appreciation.

Another factor crimping growth is the difficulty in
repatriating yuan funds to China, as Chinese regulations
technically forbid funds raised in Hong Kong from being
transferred to the mainland.

Companies that want to transfer the money raised in Hong
Kong to China or vice versa will require approval from the
People's Bank of China, further adding to the bureaucratic
hurdles that already comes with handling large amounts of yuan.

"If you're a company that needs plenty of money that can be
transferred between places easily, issuing yuan bonds in Hong
Kong is probably not an option because you need approval to get
it in, then approval again to get it out," said Ronald Wan,
managing director of China Merchant Securities.

Hopewell was allowed to transfer the money it had raised in
Hong Kong back to the mainland as foreign direct investment,
those involved in the deal say, but approval is given on a
case-by-case basis, and there is little clarity.

A second option, bankers say, is to have the money
transferred into China as an interbank transaction, thus
sidestepping the rules that stop companies from directly moving
yuan in and out of China.

BENCHMARK RATE NEEDED

Yuan deposits make up less than 2 percent of Hong Kong's
total bank deposits, or about 85 billion yuan, meaning the
territory lacks critical mass for a functioning yuan bond
market as issuers are competing for a small pool of money.

Just under 40 billion yuan worth of yuan-denominated bonds
have been issued in Hong Kong so far, most of it issued by
government-backed banks such as China Development Bank, the
Export-Import Bank of China, and by China's Ministry of
Finance.

The absence of a Hong Kong interbank benchmark for yuan
funds also means there is no pricing reference for these bonds,
while the low volume of trade on Hong Kong's yuan market means
a reliable benchmark rate -- independent of official Chinese
rates -- is yet to be established.

Companies who have issued yuan bonds so far have taken
their cue from official government bonds, with coupons ranging
from 2.6 percent for HSBC to 2.98 percent for Hopewell.

Zhang Ming, an analyst at the China Academy of Social
Sciences says China's Ministry of Finance should periodically
issue bonds in Hong Kong for benchmarking purposes.

"Before we can move on to anything else, what is needed
right now is for the market to form some sort of a consensus on
what the benchmark rate is going to be," said Irina Fan, an
economist at Hang Seng Bank.

"From there, we can then move on to pushing those products
out."
(Additional reporting by Nethelie Wong; Editing by Jan
Dahinten)