June 2015

David West

Head of Global Transaction Banking - Hong Kong
and Regional Head for the Bank’s corporate trust business
Head of Renminbi Payments Product Management,
Asia Pacific, Global Transaction Banking

The continuing evolution of the Renminbi means that China is now integral to any international organisation’s future strategy planning, be it a financial institution or corporate. Although China’s current growth is, in relative terms, slowing, foreign direct investment (FDI) into the Greater China region continues to increase, with recent developments such as the cross-border investment platform StockConnect and new quotas for the Renminbi Qualified Foreign Institutional Investor (RQFII) programme helping to boost interest in this dynamic market.

China actually overtook the US as the top destination for FDI in 2014. Many investors have been attracted to the service sector which has remained buoyant. The momentum of 2014 continued into 2015, with the service sector seeing USD 9.2 billion of FDI in January, up by 45% on a year earlier. Although this is encouraging and provides evidence of a growing market, at the end of 2014 the Chinese currency’s share of SWIFT traffic accounted for just 2.1% of global volume versus US dollar’s 44% and the euro’s 28%.

But right across the region, there are indicators of market evolution. Domestic securitisation in China continues to develop, encouraged by the Chinese government in its bid to reduce reliance on bank lending in China. This market includes a diverse range of issuers and assets, with auto loan receivables- backed securities and residential mortgage backed securities (RMBS) issued in 2014. This market is being boosted by the Chinese government’s move to allow certain Chinese subsidiaries of foreign entities to issue securitised products. The impact of this is evidenced by the number of new deals executed between May and December 2014.

China is also taking on the role as Asia’s M&A engine, which creates opportunities to provide a whole range of complementary services. In 2014, M&A picked up after a subdued period due to changes in government policies – China generated USD 390 billion of announced M&A deals, almost 90% higher than the previous year. Market professionals expect a further increase in both inbound and outbound M&A in 2015, assisted by the government’s move to streamline regulatory approval process for offshore acquisitions.

David West, head of Global Transaction Banking - Hong Kong and regional head for the Bank’s corporate trust business, explains: “Increased M&A presents opportunities and requirements for escrow as well as loan agency services, both of which play to our strengths. These are part of our comprehensive offering in major cities such as Shanghai, Beijing and Guangzhou.”

West adds that the M&A market is also playing its part in offshore funding’s appeal. “This is still attractive to Chinese and Taiwanese financial institutions and corporates, mainly due to lower funding costs for Chinese entities acquiring overseas assets.”

Offshore activity around bond instruments is also vibrant at present, although issuance of so-called Dim Sum Bonds – those issued offshore but denominated in offshore renminbi (CNH) - have declined in 2014-2015. “We have seen a rise in the credit-enhanced bond products such as standby letters of credit-backed bonds and other structured loan products,” says West. “Overall, the market is still an exciting place although challenges do exist, notably with some recent defaults that have tempered market enthusiasm. This has meant that some deals are being put on hold or are taking longer to complete.”

Both StockConnect and the new quotas for RQFII are providing access to Chinese debt and equity markets. StockConnect links-up the Shanghai Stock Exchange with the Hong Kong Stock Exchange. “This was a groundbreaker in that it was the first expandable channel for mutual access between mainland China and Hong Kong by a new investor base. So far, momentum is building slowly, but upgrades in Hong Kong are underway they hope will prompt greater levels of activity,” says West.

StockConnect is unlikely to take the place of RQFII, which was one of the first steps in the RMB’s internationalisation. QFII and RQFII allow foreign investors to invest in the RMB-denominated capital markets. Sceptics have suggested that while RQFII provides access to a wide range of investment products, StockConnect comprises fewer than 600 stocks. “Investors are continuing to seek individual quotas to buy , for example, A shares under RQFII and Renminbi QFII programmes, the only way that foreign investors could access the domestic market prior to StockConnect,” says West. RQFII works by a quota system and new quotas were provided, due to demand, at the back-end of 2014, with China granting over USD 1bn of net QFII quota to nine foreign institutions.

Despite the teething problems with StockConnect, West believes that the developments in China all point to one thing: continuing momentum behind the internationalisation of the RMB and increased integration of China’s capital markets into the global economy. Investors will certainly have greater access to China’s growth trajectory.   “This is a market of rich opportunity and we are certainly allocating resources to serving our clients. But it is one that needs to be carefully navigated and that’s why we are using our expertise to help guide our valued clients.”

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