June 18 (Reuters) - Small and mid-cap Chinese companies are going offshore to meet their U.S. dollar needs, using guarantees from mainland banks despite the increased costs the deals incur.

With credit controls tightening in China, going offshore for dollar funding had become a lifeline for many of small- and mid-cap companies, according to bank sources, and as such they did not mind the costs incurred with the guarantee structures.

Chinese small and mid-cap private enterprises find it hard to get funds (offshore) without a strong guarantee. Their bargaining power is lower than sizeable private and state-owned enterprises, which can come to the offshore market for U.S. dollar borrowings with limited guarantees, said a banker with a Chinese bank in Hong Kong.

So far this year, loan volume for Chinese companies borrowing through offshore entities totaled $4.19 billion from 12 deals, nearly five times more than $884.9 million from seven deals completed in the first half of 2009, according to Thomson Reuters LPC data.

Speculation about a yuan revaluation is also driving demand for dollar loans, as Chinese companies with yuan revenue will gain when they repay dollars if the yuan appreciates as many expect.

STANDBY LETTERS OF CREDIT

Small and mid-cap private enterprises have been asking local Chinese banks to issue standby letters of credit (LCs), which serve as collateral in the event of default. The guarantee fee for a standby LC ranges from 100 basis points (bps) to 300 bps.

Given the lower risk and short tenors of these local banks-guaranteed deals, offshore lenders have a strong appetite for granting loans on a bilateral basis. These offshore dollar loans offer margins of around 100-150 bps over Libor with three-year tenors.

However, the guarantees from Chinese banks do not mean the financings are risk-free. Lenders have to take Chinese banks' risk and still have to verify the standby LC issued by the Chinese banks, and process a claim in the event of a default. (Editing by Chris Lewis)

China U.S.