As founder and CEO of NeuGroup, I spent several days recently in Hong Kong gaining insight on developments from this international gateway to China. Exchanging knowledge with JP Morgan, Citi, the HKMA, Bosera Asset Management, Thomson Reuters, HSBC and other local contacts, I came away from my visit with several takeaways.
• Cash out of China. The brakes put on outflows of cash and capital at the beginning of the year still have MNCs thinking cash-out vs yield pick-up with cash parked in China. Perceived deval risk could easily wipe out expected yield. The end to explicit guarantees on locally-offered wealth management products has put more remaining cash in time deposits and limited AAA funds.
• Prepare for allocations when it's time. Implicit guarantees remain, however, and the trick to sorting out credit risk in China is seeking to understand the nature and strength of them. For example, some SOEs are likely funding SPVs for local Chinese governments, so they are more like quasi-muni risks. Medium-to-longer term any fixed income investor of size will need to get comfortable with China credit risk to catch the inflection point when portfolio allocations to China and RMB holdings will need to ramp up to reflect the size of this market. Getting the pipes, policy and risk perspective in place to pull the trigger on this in a timely way is a job to be doing now, if you’ve not done it already.
• Banking challenges with Basel III. Asia jurisdictions will be implementing their interpretations of Basel banking regulations over the next several years. In China, this comes at a time when rates liberalization has compressed NIM and fee business to offset this is still a new phenomenon. Accordingly, foreign banks hope their familiarity with international bank regulations will be a competitive advantage versus local banks, but they nevertheless struggle to operate profitably without the same local government support. Efficiency and consolidation are thus the watchwords for banks and their MNC customers in the region. Shadow banks may fill the breach, as will FinTech innovations. Treasurers should note also that on the banking side, investment in new pipes to support China’s financial liberalization will allow innovations to flow faster once China allows the pendulum to swing back toward reform.
• Hong Kong incentives level the playing field. Tax and other incentives are not the only reason to pick the location of your Asia regional treasury center, but Hong Kong has at least taken them off the table as a reason to go with Singapore or a mainland China SPV.
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