rmb globalisation 2 · rmb globalisation 2.0 get ready for the reboot cover-r6.indd 1 31/5/16 5:57...

May 2016

AIIB president shareshis plans for the bank

Taiwan proves fertilefor European FIGs

HSBC leads the packin o�shore RMB poll

From the publishers of

RMB globalisation 2.0Get ready for the reboot

Cover-r6.indd 1 31/5/16 5:57 pm

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GlobalCapital May 2016 1

CONTENTS

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26 Ten questions for the RMB market We survey the market for their views on the most pressing topics in renminbi internationalisation.

Also in this report2 AIIB president interview Jin Liqun shares his plans for the Beijing-based supranational.

4 European issuer focus European banks are �nding a welcome reception in Asia’s bond markets.

30 China Securitization Forum awards The winners and photos from the industry event.

32 Asean Bond & Treasury Markets roundtables

The Kuala Lumpur leg of our panel discussions.

46 Reforming a nation Modi brought India back from the abyss on the promise of change. It’s now high time for him to deliver.

51 HK Stars Index Investors need to take more account of internal governance related risks.

Cover Story: RMB globalisation 2.08 Panda bonds �ght for survival Panda bonds have bene�ted from plenty of hype but the market is plagued by a number of problems and regulators need to act.

10 The struggle for renminbi stability China’s shi� to a less managed exchange rate has come under scrutiny and the Federal Reserve could derail e�orts to stabilise the currency.

14 Welcome, you are now entering China China’s noticeable shi� in its currency strategy heralds a new phase in renminbi internationalisation.

16 A-shares: coming to an index product near you Index providers are once again discussing the potential inclusion of A-shares with global investors.

O�shore RMB poll20 HSBC pulls ahead Bank leads Asiamoney’s poll for the ��h year running.

22 O�shore RMB poll results

Contents-Masthead-r5.indd 1 31/5/16 7:03 pm

2 GlobalCapital May 2016

AIIB

International investors are "very enthusiastic" about the prospect of investing in bonds and other debt instruments to be issued by the Asian

Infrastructure Investment Bank, its president said in an exclusive interview at the Asian Development Bank’s annual meeting in Frankfurt in May.

The comments by Jin Liqun were aimed at countering doubts about the ability of the new China-led institution to tap international capital markets in view of its short track record and assumed inability to obtain triple-A status from international rating agencies.

Jin also revealed more than has previously been disclosed about the global nature and location of AIIB operations, and its relations with the One Belt One Road (OBOR) concept.

"I have done some preliminary study and survey of the demand for possible bond issuance for private placement of AIIB [instruments] and the response was very positive and good," he said.

"We believe the AIIB can ben-e�t from the huge liquidity in the Chinese market as well as in the international capital market. Whether it will be through private placement or public o�ering [of debt instruments], this is something we will have to discuss. We have no �xed ideas but the response from the market is that either way it's �ne.

"Early on I talked to Chinese investors and they were very posi-

tive and also I inquired about the demand in the international capital markets and it's okay. I'm pretty sure that the enthusi-asm will be very high."

The Beijing-based AIIB is "still having internal discussions" on the optimum method of �nancing, Jin said. "As a normal practice MDBs [multilateral development banks] would not spend all their capital on �nancing.

"They manage their equity capital to achieve returns and also do debt �nanc-ing so that they can support projects in the borrowing countries. This is normal

practice and we will more or less follow this practice.

"But this is a challenge at this stage because interest rates have remained very low for so long. A number of MDBs are faced with a tough situation of how to improve returns on their capital.

“This is a new situation which may drag on for some time. We need to have a good discussion on this issue and we are seek-ing the support of the board as to the way in which we manage our �nances.”

He said that he wanted to reduce the funding cost to the minimum possible,

thereby reducing the burden on borrowing countries. “Our bank's core principle is to be lean, clean and green,” he said.

“We want to be cost-e�ective. I take care of the bank's �nances because we know that equity capital comes from taxpayers' money and we should be the best guardians of taxpayers’ resources."

GLOBAL COVERAGEOn the AIIB's proposed theatre of operation and project selection, Jin said: "Our bank is committed to serving all the emerging market economies of the members. It is not just the emerging market countries in Asia that will bene�t.

“Certainly the majority of the borrowing countries will be Asian countries. But since we have emerging market economies from other regions like Africa, Latin American and Eastern

AIIB president cites strong demand for bondsThe president of the Asian Infrastructure Investment Bank, Jin Liqun says that he expects strong demand for its debt and reveals that he is looking to invest in emerging economies across the world as well as in Asia. Interview by Anthony Rowley.

JIN LIQUNpresident of the Asian In�astructure Investment Bank.

AIIB-r2.indd 2 31/5/16 5:59 pm


AIIB

European countries [in the membership] we may cover a more broadly geographical coverage.

“Over time, we need to strike a proper balance between the regional and non-re-gional borrowing countries and among the sectors because infrastructure projects can only play their role when the investment in infrastructure is well co-ordinated."

Jin clari�ed the relationship between the AIIB and the OBOR concept announced by China's president Xi Jinping to connect Asia and Europe via Central Asia — and also to link in part of the Middle East and Africa.

"One Belt One Road certainly is related to the AIIB but they are not the same thing," he said. "The AIIB is not created exclusively to �nance OBOR projects. The AIIB covers more broadly countries across the world.

"Generally speaking, we highlight the importance of regional connectivity. Those projects which are good for the borrowing country with positive spillovers across borders will certainly receive high priority. The projects we can consider should be �nancially sustainable, environmentally friendly and socially acceptable."

The AIIB is "working with the World Bank, the Asian Development Bank, the European Bank for Reconstruction and Development, the European Investment Bank — and possibly with other regional development banks in the future," he said.

FIRST BATCHThe AIIB o�cially opened its doors for business early this year but intends to take a "step-by-step" approach to becoming fully operational, Jin said.

The bank held its �rst board meeting on January 17 and the second on April 25-26. "Those two board meetings helped us set the stage for our operations. We approved all the basic documents and the basic policy papers and we discussed the way of moving forward.

"At the third board meeting in late June the management will deliver the �rst batch of projects for the Board to consider. Less than six months into operation, we can manage to launch projects because we had prepared them before the bank was operating, saving us time.

"We want the AIIB to be lean," Jin emphasised. "Learning from the experi-ence of existing MDBs, we tried to expand our sta� step-by-step, along with the expansion of programmes.

“I am not going to recruit a huge number of people sitting there waiting for jobs to do. When we focus on certain key sector such as power, road, railways, we can iden-tify professionals and recruit these people."

Jin highlighted the fact that "over the �rst couple of years there might be high

concentration [of ADB projects] in one or two countries and in one or two sectors because we want to build up the portfolio as quickly as possible.

“We cannot wait for some countries to come up the projects while those countries with projects have to wait. Over time, we will achieve country balance and sector balance." ◼

This article �rst appeared in Emerging Markets - www.emergingmarkets.org

Senior policymakers at the Asian Development Bank annual meetings appeared non-plussed about a Donald Trump US presidency and were reluctant to be drawn — although one expert doubted the Republican challenger knew what the ADB was.

As the possibility of US President Donald Trump moved closer to reality, Asian policymakers were quick to downplay his impact on US-Asia relations.

Senior government o�cials, bankers and analysts said they were focused on the state of the global economy and that a change of power in the US did not loom large on their radar screens.

Asked for his reaction to a Trump presidency, IMF deputy managing director Mitsu-hiro Furasawa said that Asia could live with whichever candidate wins the election.

Sri Lanka’s �nance minister Ravi Karunanayake was more straightfoward — and blunt — in his response. “It is strange to see America going into such political tur-moil,” he said. “I thought there was much more sanity in the system.” In any case, he added: “Hillary will win.”

Asked how a Trump presidency might impact US relations with Asia, former senior US Treasury and ADB o�cial William Thomson said: “It’s very hard to say because Trump doesn't have at the present time an established team of advisers.

“He certainly is not as at the present time willing to take the conventional people from the think tanks, so it’s not clear at all what he would come up with.

“What he has said is o¥en unpredictable and contradictory. I think that were he to become president — and I think it’s unlikely — then we would have to be braced for some shocks.”

On the possible impact on US relations with multilateral institutions, Thomson said: “Again it depends upon whom he would end up by appointing. I think the big-gest shock would be for NATO. I'm not sure that he would even know what the World Bank or Asian Development Bank are.”

India’s �nance minister Alan Jaitley noted that what candidates said during their election campaigns rarely had a strong bearing on “what happens when people are in government”.

Pakistan’s �nance minister Mohammed Dal suggested that the US and its partners would “learn to work together” whoever was president, while the Indonesian �nance minister Bambang Brodjonegro noted only that he placed his faith in the fact that the US was a “mature nation.” ◼

Reporting by Anthony Rowley and Virginia Furness

ASIAN VERDICT ON TRUMP — ‘HE PROBABLY HASN’T HEARD OF THE ADB’

AIIB-r2.indd 3 31/5/16 5:59 pm


European Issuers

For European borrowers, the Asian bond market has long been a go-to place for debt-raisings. In 2015, issuers raised $10.48bn via 194

bonds sold in various Asian local curren-cies, according to Dealogic. This was a big jump from the $5.4bn raised from 72 deals the year before and also exceeded volumes in each of the years since 2010.

And if activity in the �rst few months of 2016 is anything to go by, the attraction of Asian markets has only increased. Year-to-date issuance in Asian local currencies by

European issuers stands at $3.28bn via 50 deals at the time of writing.

In addition, European names have been keen to tap into local dollar liquidity in Taiwan. Financial institutions have led the issuance with the likes of ABN Amro, Deutsche Bank, Natixis, Rabobank and Société Générale heading to the Asian country this year — some multiple times. Year-to-date sales of dollar bonds in Taiwan by European names are $6.74bn from 27 deals. To put that into perspective, $7.57bn was recorded all of last year from 32 deals.

“Financial institutions are generally active throughout the year as they have wholesale funding programmes,” said Ashish Malhotra, Standard Chartered’s Singapore-based global head of bond syndicate. “They already have MTN programmes set up to take advantage of liquidity wherever it is. That is why for the last few months we’ve been seeing interest from �nancial institu-tions looking at Asian pockets of liquidity.”

According to Augusto King, managing director and head of capital market group, Asia, at Mit-subishi UFJ Financial Group, the region has developed a signi�cant pool of liquidity that can support not just Asian issuers but also other recognisable names. This is thanks to ample liquidity from

wealth management �rms in Singapore and Hong Kong, life insurance companies from Taiwan and some home-grown asset managers, he added.

That has not gone unnoticed by Euro-pean borrowers, which are �nding di�erent ways to tap into Asia. Some are focusing on speci�c markets like Taiwan or Singapore while others adapt their bookbuilding strategies to either open books during Asian hours or keep the deal open for an additional half day.

This is not just about capturing broad Asian liquidity but also wooing sovereign wealth funds and central banks, which are increasingly taking up bigger portions of European bonds, say bankers. These include funds from China, Singapore and South Korea, which are considered among the more engaged and savvy �xed income investors.

“Sovereign wealth funds always invest in multinational names,” said an Asian head of capital markets. “Issuers from Europe frequently visit [Singapore’s] Temasek and GIC which invest globally in bonds. But their appetite is skewed towards invest-ment grade and well known issuers.”

He added that one of the reasons such funds are more active in pursuing European credits is because Asian debt volumes have dropped signi�cantly this year. Year-to-date, 90 public G3 bonds worth $68.05bn have been sold by Asia ex-Japan issuers. During the same time last year, $85.5bn had been raised from 108 transactions.

European issuers welcome new Asian liquidity European issuers are tapping into select pools of liquidity in Asia, with Taiwan and Singapore proving they can deliver both size and cost e�ective funding. And as deal volume in Asia declines, European bonds are also bene�tting from a higher take up from Asian central banks and sovereign wealth funds. Rashmi Kumar reports.

RAYMOND WANGJones Day.

European Issuers-r3.indd 4 31/5/16 6:00 pm


European Issuers

“If I’m a sovereign wealth fund in Asia and if I have a portion of my funds to invest in bonds but there is no paper, then I will go to European credits,” added the capital markets head. “It is not necessarily a change in investment strategy, it’s more about looking else-where for opportunities.”

While there is no o£cial data to show the average take up by Asian sovereign wealth funds in European deals, anecdotally bankers say that their activity has increased in both European bonds that are marketed in Asia and transactions without any Asian bookbuilding.

TAIWAN CALLINGOne investor base that has cemented its importance to European issuers is Taiwan. The country’s investors have a long history of buying European credits and so European issuers frequently sell notes targeting just the Taiwanese market.

Last year, the continent’s borrowers sold $9.65bn of bonds through 58 deals into Taiwan, in currencies including renminbi, Australian dollar, South African rand and US dollars. Already this year, $6.79bn has been raised from Taiwan — $6.74bn of which was in US dollar-denominated debt and the remaining in renminbi, which are called Formosa bonds.

“The Taiwan bond market has seen a natural progression,” said Benjamin Lam-berg, managing director, global co-head of MTNs and private placements and Asian syndicate at Crédit Agricole. “Taiwan, which was the land of ‘SSA zero callable’, has diversi�ed into credit a few years ago. The innovation in the market has been to let Taiwanese lifers invest their domestic portfolio into more diversi�ed global credit names — hence why the ¨urry of strong household names for the last 18 months.”

In 2015, the Financial Supervisory Com-mission loosened rules governing bonds sold by foreign issuers into Taiwan. Until then, the debt fell into the international category and onshore insurance �rms are prohibited from having more than 45% of their total portfolio in foreign bonds.

But following the change, such notes — provided they are listed in Taipei — no

longer fell within the investment cap meaning there was no limit on how much domestic lifers could buy.

The Taiwanese regulator went a step further in January 2016 by giving the nod for �nancials to sell tier two debt, provided they have issued senior debt in the past. Eligible issuers are required to use the same issuing entity as the senior debt and again the bonds must be listed in Taipei.

The changes have shiªed the dynamics of the country’s bond market.

“The Taiwanese regulator’s objective is to promote the development of Taiwan’s �nancial markets,” said Alan Yeoh, manag-ing director, head of capital markets group for Asia at MUFG. “By allowing Taiwan lifers to buy foreign issued debt as their domestic investment bucket, it e�ectively allows higher foreign currency investment. Also, more issuers then have the incentive to issue bonds in Taiwan, again promoting the development of its �nancial markets.”

“Taiwanese insurance companies who hold a lot of insurance funds are major investors in international bonds in Taiwan,” said Taipei-based Raymond Wang, an of counsel lawyer at Jones Day. “Given the FSC wanted to keep the insurance funds onshore (rather than have them go o�shore) as well as to boost local capital markets, the restriction on foreign invest-

ments by insurance companies was relaxed.”

But while Taiwanese investors are keen to put their funds to use, not every kind of credit will win them over. Investors are sensitive to ratings even if they have ample liquidity, because of a rating threshold imposed by the FSC. This means that only issuers that are triple-B rated or higher can sell notes into the country.

ABN Amro was the �rst to capitalise on the 2016 relaxation. The Dutch bank sold a $240m privately placed medium term note to Taiwanese investors on March 3, laying the groundwork for a tier two trade. It followed up on March 16, selling a $300m 15 year Basel III compliant tier two with a 5.6% coupon. With that, it became the �rst interna-tional issuer to sell bank capital notes in Taiwan following the rule change.

The same month, it also returned to Singapore’s bond market for the �rst

time since 2012, raising S$450m ($329m) in tier two format.

“We have a long history in the Asian debt market,” said Danielle Boerendans, head of long-term funding and capital issuance at ABN Amro. “At the end of 2015 we did a roadshow in Asia and got pretty positive feedback. At the start of the year, the European bond market was shut so it is always helpful if other markets are open for us to raise funds. So these deals are not about arbitrage. It is about diversifying in currencies and investor base and if we see opportunities in niche markets we will do it.”

COST CONTROL That said, many issuers will only tap new markets where there is either the chance to price at the same level or below existing curves. This means the decision to venture out to di�erent markets is oªen swap-de-pendent. In some cases, favourable swap costs have allowed European investment grade names to save as much as 50bp-60bp on their existing euro curves.

For investors, yield and diversi�cation are the key focus.

“Asian investors are looking for yield but they are not yet prepared to go down the credit curve to get that for now,” said Cli�ord Lee, head of �xed income at DBS.

ALAN YEOHMUFG.



European Issuers

“They are more likely to buy from issuers they know and are comfortable with and take on more duration and structural subordination risks where needed to achieve a higher yield.”

One country where that trend is evident is Singapore, which bankers say is typically the go-to market for smaller transactions, especially for bank capital trades. In 2015, three European borrowers — BPCE, BNP Paribas and Julius Baer — raised S$850m collectively from Singapore’s bond market. This year already, ABN Amro net S$450m and France’s SocGen sealed S$425m on May 11.

But while Singapore provides a good alternative, there are challenges hold-ing it back. For starters, benchmark issuance that is normal in the dollar market ($500m) is not oªen seen in Singapore dollars, given the market’s smaller size, say bankers.

This e�ectively means that issuance is driven mainly by domestic issuers, rather than foreign names. “The Singapore dollar bond market is domestic for domestic where three banks own 70% of the market and 85% of the issuance is domestic,” said a DCM banker in Hong Kong.

That doesn’t mean there are not oppor-tunities. Given Singapore’s investor base is dominated by private banks, bank capital, subordinated and high yield bonds have the potential to gain traction, added the banker. It can also become the market of choice during periods of volatility as banks are viewed as safe bets, while the structural subordination can o�er investors extra spread over typical senior notes.

With so many multiple fundraising ave-nues available, international investors too are keen to take advantage of the growing opportunities in Asia.

“It’s not surprising that overseas funds have started looking outside of Europe to put their money, given Europe is in a negative rate environment at the moment,” added Sean Chang, head of Asian debt at Baring Asset Management.

He added that Barings’ Asia portfolio is expected to raise its exposure to European names in the next six months, given the expectation of more credits coming to tap liquidity in the region.

RENMINBI POTENTIAL However, interest is unlikely to spread quickly to many other Asian currencies given regulatory challenges such as withholding taxes or di£culties in moving funds o�shore.

But many bankers and investors remain hopeful about the renminbi, despite the public market being more or less shut following the currency’s devaluation last year in August.

In publicly o�ered dim sum bonds, just Rmb2bn ($317m) has been raised so far this year from four transactions globally, of which Rmb1.4bn (two deals) came from European names. But private placements have proven more popular, with European borrowers raising Rmb3bn, shows Dea-logic. Global CNH private placement bond volumes year-to-date stand at Rmb10.9bn via 57 trades.

“Since last August, we have seen more o�shore renminbi issuance from European issuers in the private placement format as the public market has not been stable enough to launch benchmark transac-tions,” said Lamberg. “Having said this, the current period of stability we are expe-riencing in the second quarter may reopen this market.”

According to Lamberg, Asian liquidity can be best accessed via private place-

ments especially as not all local markets can absorb large and frequent public benchmark trades.

This becomes all the more impor-tant for diversi�cation as private placements help them match their needs with a new investor base.

“Renminbi will be the trend going forward,” reckons Barings’ Chang. “Lots of global issuers have factories in China, so they will need to borrow in the Chinese currency to fund their units.”

Lamberg added that he was a big believer in the “exponential growth and internationalisation of the ren-minbi – both onshore and o�shore”.

“I do not buy into the end of ‘o�-shore CNY market‘, the so called dim sum, because there is so much RMB liquidity o�shore, which you can see when you look at usage of renminbi for payments of goods and services or

speak directly to any corporate treasur-ers,” he said.

GROWING PANDASIn fact, many bankers reckon that onshore RMB will eventually co-exist with the o�shore market. And given the domestic market is massive but underdeveloped, there is a large potential for non-Chinese issuers to access the market via Panda bonds, or onshore renminbi debt sold by non-Chinese issuers.

That said, while the Panda market has potential, there are also plenty of drawbacks at the moment. Issuance has to be approved on a case-by-case basis and no o£cial guidelines have yet been published.

But the outlook is positive. Bankers are of the consensus that the Panda market will grow steadily, potentially to hit 20-30 transactions a year. At the moment, the market has jumped from three trades in six years to six in six months.

“The Chinese bond market will wel-come the diversity o�ered by this new asset class,” said Lamberg. “When we compare the current size of the Yankee bond market [dollar bonds sold in the US by foreign issuers] of around 20% versus domestic US market, we may only hope that the Panda will follow this path.” ◼

BENJAMIN LAMBERGCrédit Agricole.


The China Debt Capital Markets Summit 2016中国债务资本市场峰会2016

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This timely summit comes as China’s bond market aims to become global. Designed for both Chinese and international market participants, discussions will cover the latest developments in the panda bond, green bond, and securitisation markets. Additional sessions will examine the opportunities for foreign investors to participate in the interbank bond market and for Chinese borrowers to access funding through global debt markets.

Join over 600 participants to gain insight into the rapidly developing Chinese financial market reforms, the internationalisation of the RMB and to understand China’s emergence into global markets.

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International borrowers: Understanding the policies and developments for the onshore panda bond market and the state of the offshore dim sum market.

International investors: Investing in China’s onshore interbank bond market – the world’s third largest with above global-average yields.

Chinese borrowers: Foreign currency funding, diversifying investor base and understanding pricing considerations in USD, EUR and CNH.

Chinese investors: Examining offshore opportunities, impact to onshore yields as reforms take hold and diversification through investing in the panda market.

Attendance is free for issuers and investors.

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Agenda topics include:• China’s Bond Market Going Global• How worrying is the cut on China’s credit outlook?• Is volatility slowing the pace of capital market reforms in China?• What role can global markets play in financing China’s ‘One Belt, One Road’ initiative?• Onshore panda bond market vs offshore dim sum market• The Growth of China’s Green Bond Market• Bank capital funding• Is access to the Chinese onshore market a compelling investment story?• RMB Internationalisation or Re-nationalisation?• Offshore funding trends and pricing considerations for Chinese borrowers

Media Partners

2 June 2016 • The Westin Financial Street, Beijing


RMB Panda Bonds

The People’s Bank of China reo-pened the Panda bond market in September to the usual mixture of excitement and scepticism that

tends to greet new initiatives from China.The restoration of Panda debt, which

allows non-Chinese issuers to sell ren-minbi bonds onshore in China, came at a time when markets were still reeling from a surprise devaluation in the currency.

Add to that, the lack of o�cial guide-lines or a framework and the prospect of Panda bonds brought with it as much uncertainty as it did opportunity.

But progress has been steady. Since Bank of China (Hong Kong) and HSBC sold Pandas on September 29, issuers have raised Rmb12.9bn ($2bn), according to data from GlobalRMB.

Issuers have included the governments of South Korea and the Province of British Columbia and more controversially red chips names — Chinese companies incor-porated internationally and listed in Hong Kong — including real estate �rm Country Garden and China Gas.

As a result of the activity so far, market observers are upbeat about the prospects.

Yan Yan, chairman of China Chengxin International Credit Rating (CCXI), forecast earlier this year that issuance could reach over Rmb300bn by 2020, as CCXI has over 100 Panda bonds waiting to be rated.

Meanwhile, Deutsche Bank wrote in a report in January that it expected Rmb20bn of Panda bonds this year.

“Since the beginning of 2016, we have seen an explosion of interest in issuing Panda bonds from both corporate and public sector issuers,” said Jinny Yan, chief China economist, China Markets Strategy at ICBC Standard Bank. “I would say at this stage we also have interest from the public sector and �nancial institutions in Africa.”

“European blue chips that have a big presence in China do have real RMB demands, especially those which have dim sum bonds maturing in the next few years. Given the additional onshore accounting and legal requirements, corporates with a maturity requirement beyond six months will have a high demand to tap this new market.”

Borrowers that have expressed an inter-est in selling onshore renminbi debt include DBS, Export-Import Bank of Korea, Hungary, Intel and Sri Lanka.

UNCONVINCED INVESTORS But while there is plenty of buzz, Panda bonds face some fundamental problems. Not least of which is that Chinese investors are less than enamoured by foreign issuers.

It may seem strange that Chinese onshore investors are not keen to buy foreign names, even those that are internationally rated triple-A, but several bankers and sales people who worked on the British Columbia Panda trade told Asiamoney that potential buyers asked questions that included: “Where is British Columbia? Is it in the UK? What do they do?”

The fact the British Columbia is a regular issuer of bonds globally and has the highest rating from Moody’s, Standard & Poor’s and Fitch carries little weight with domestic Chinese investors.

“Why should I invest in the names that I’m not familiar with when I already have tons of bonds to choose from back home, with the issuers’ names that are super well known domestically?” said a �xed-income asset manager based in Beijing.

While the asset manager bought one of the Pandas issued last year, he said the only reason was because “the issuer’s name is well known in China and is our shareholder”.

“The Chinese investor base is very dif-ferent from what they have in the o¥shore market. The China market has been closed for a long time, and a dominant number of the onshore investors don’t even have an internal credit line to allow them to buy these foreign names,” he added.

And he is not alone. His views were echoed by other sales people and investors that spoke to Asiamoney. Other concerns include how to model the default risks of a Panda bond.

“Even though names like the Korea government or Daimler are no strangers to Chinese investors, it is obviously much harder for us to keep up with all the news related to these two issuers,” said another investment manager with a big bank in China.

“It is very likely, the most up-to-date information about these two issuers will be

Panda bonds �ght for survival There’s been plenty of hype about Panda bonds as borrowers and bankers scramble to take advantage of this new avenue into China. But for all the momentum the market has shown since reopening, it is plagued by a number of problems including a lacklustre response from onshore investors. Regulators need to act if the market is to reach its potential, writes Carrie Hong.

RMB Panda Bonds-r5.indd 8 31/5/16 6:01 pm


RMB Panda Bonds

in the news in their own language, and this puts Chinese investors in an unfavourable situation if they want to exit an invest-ment.”

Several bond traders are also concerned about how to contact a foreign issuer if a default were to happen.

“Who knows where the representative o�ce of British Columbia in China is?” said one of the traders.

REGULATORY ROADBLOCKSGetting the Chinese investor base onboard is key if this market is to grow beyond being a niche product. But while that it is likely to happen over time and along-side the ongoing opening up of China’s capital markets, Panda bonds su¥er from more pressing problems in regards to regulation, speci�cally those related to accounting standards, and the remittance of proceeds.

“Some concerns for potential issuers are indeed on the regulatory side. There is still not enough transparency on the eligibility or requirements for Panda bond issuance. A set of regulations are really needed from the international issuers’ perspective,” said Kennis Wong, head of Greater China debt capital markets at Mitsubishi UFJ Securities (HK).

While there are no o�cial guidelines, any borrower wanting to sell a Panda bond must provide �nancial statements in a format recognised by regulators. Those are People’s Republic of China Generally Accepted Accounting Principles (PRC GAAP), Hong Kong GAAP or the European Union’s International Financial Reporting Standards (IFRS).

This is already causing problems for some of the issuers who would be most keen to sell debt onshore.

For example, Asian Development Bank and International Finance Corp — the two issuers who sold the �rst ever Panda bonds in 2005 — will not be able to make a quick return as they �le their �nancial reports under US GAAP.

Both have previously received waivers from the Chinese Ministry of Finance, but neither has been granted an exception for future issuance. That said, talks aimed at solving the problem are ongoing, according to o�cials from both supranationals.

Given that it would be quite di�cult for the many issuers who use US GAAP

to change their accounting standards, it is hoped that the People’s Bank of China and the Ministry of Finance will consider relaxing the requirements for the sake of the market’s long-term development.

There is also a great deal of uncer-tainty about the ability of issuers to move proceeds o¥shore. At the moment it is on a case-by-case basis but there seems to be no pattern to the approvals. The problem is complicated by the fact that China has spent a lot of this year trying to stop capital leaving the country following volatility in the renminbi. The result is that some issuers have come up with innovative ways to get the money out of China.

In February, China Gas used its entity in Shanghai’s Free Trade Zone to remit the proceeds.

While some market participants believe the ability to freely move proceeds cross-border would act as an incentive to issuers, others argue it would accelerate

capital out©ows as there is still a high expectation of further RMB depreciation.

“So whether they remove the accounting barriers or allow more ©exibility to move the proceeds in and out of the country, it would probably take some time for the Panda bond market to be taken seriously by foreign issuers,” said an onshore DCM banker.

ONSHORE VS OFFSHORENotwithstanding the problems, most market participants believe Panda bonds are here to stay. For now they are bene�ting from the low interest rate environment in China and could get a boost if Chinese bonds are included in global indices. Moreover, they o¥er some advantages over o¥shore renminbi (dim sum) bonds.

“Dim sum bonds are very susceptible to liquidity changes in o¥shore renminbi as well the issuing costs of euros and dollars,” said ICBC Standard’s Yan.

“In contrast, we are con�dent that onshore RMB liquidity will remain abundant in the long term and that the low interest rate conditions in China are likely to last.”

Meanwhile, MUFJ Securities’ Wong points out that Panda bonds also o¥er diversi�ca-tion bene�ts to issuers.

“If you look at the issuance of some big frequent borrowers such as the Export Import Bank of Korea or Korea Development Bank, you will �nd that they’ve tapped many currencies because their strategy is to diversify their investor base,” she said.

“In that case, the Panda bond market certainly presents a good option to them as they have large funding needs.”

Ultimately she believes the o¥shore and onshore renminbi bonds markets are com-plimentary much like the Eurodollar and domestic US dollar debt markets.

“I believe dim sum and the Panda bonds can coexist. While the dim sum bonds are like the dollar Reg S market with more simpli�ed disclosure and issuance require-ments, the Panda bond market is similar to 144A issuance that taps into domestic liquidity and follows onshore regulations,” she said.

“When the RMB becomes fully converti-ble, issuers can then choose whether to go through a more stringent issuing procedure but access the deeper investor pool that Pandas o¥er, or to choose an easier way with dim sum instead.” ◼

KENNIS WONGMitsubishi UFJ Securities (HK).

JINNY YANICBC Standard Bank.

RMB Panda Bonds-r5.indd 9 31/5/16 6:01 pm


RMB FX

Talk about moving markets. When the People’s Bank of China announced a new methodology to set its daily

USD/CNY fix last August, the market was so unprepared for the change that it caused the renminbi to depreciate nearly 2% — the largest single day fall in the currency. It also started off a chain reaction that spread to equity markets and forced regulators to take extraordinary steps to stabilise China’s financial markets.

It was not meant to be that way. The change was part of China’s commitment to liberalise its currency by introducing a more market-oriented RMB fixing.

Under the new regime, market-makers to the China Foreign Exchange Trade System (CFETS) were asked to take into consideration the previous day's interbank foreign exchange market closing prices, the supply and demand dynamics in the market and global market developments when submitting pre-open quotes. The PBoC would then take those quotes into account when calculating the �x (see box on page 12).

Previously, the PBoC had never explic-itly told market-makers the basis on which they should make their pre-open submis-sions each day.

The change had long been called for and was seen as an important step in the

maturation of China’s �nancial system. But what rattled markets was the fact that the PBoC said it expected the new system would lead to weaker �xes. That news coincided with poor exporting and manufacturing data and led to a massive sell-o� in Asian equities as markets got spooked that the Chinese economy was in trouble.

The result was a Chinese equity market that ended the year almost 30% down from its peak in June 2015, causing large capital out�ows and leaving a lingering question mark over China’s �nancial strength. The downward pressure on the renminbi also continued, with the currency hitting Rmb6.6 against the US

The struggle for RMB stabilityChina’s transition from a highly managed exchange rate regime to a more �exible one has come under much scrutiny, especially in light of the sharp drop in the renminbi. Even though the currency has started to stabilise in recent months, the Federal Reserve is still a wild card. Rev Hui reports.

CNY/USD

SOURCE: CLSA; CEIC

Jan15 Mar15 May15 Jul15 Sep15 Nov15 Jan16 Mar16

6.7

6.6

6.5

6.4

6.3

6.2

6.1

6.0

(CNY

/USD

)

RMB FX-r3.indd 10 31/5/16 7:04 pm


RMB FX

dollar by the end of 2015. In comparison, it was quoted at about Rmb6.2 before the �asco.

SHORT-TERM STABILITYBut there have been signs of stability in recent months with the currency hovering around the Rmb6.4-Rmb6.5 area since the middle of March (see chart on previous page).

While China has made no o�cial state-ment on the currency’s recent equilibrium, the consensus is that the PBoC has been using its vast foreign currency reserves to support the renminbi.

This is borne out by the �gures which show the country’s FX reserves have fallen by $800bn since peaking at nearly $4tr in June 2014, according to data from the People’s Bank of China. Approximately $300bn of that loss has been recorded since August. While the reserves increased $8bn in March and a further $10bn in April, out�ows are also continuing (see chart above).

David Mann, chief Asia economist for Standard Chartered, agrees that the coun-try’s usage of its FX reserves has been a key reason for the currency’s stability in recent months.

“China could risk triggering capital �ight and panic if it allows the renminbi to depreciate now,” he said. “The out�ows we experienced last year were mainly caused by depreciation concerns in the �rst place.”

However, he does not think that dwin-dling FX reserves will naturally lead to

movements in the renminbi as the country still has plenty of other measures to sup-port the currency.

Instead he points out that since the end of last year the PBoC has also been actively using the derivatives market to support the renminbi. This involves getting state banks to borrow in US dollars, which they subsequently sell.

The PBoC then enters into forward contracts with the state banks, which e�ec-tively means it will take those trades onto its own balance sheet at a future date. By doing so, the Chinese central bank is able to keep the renminbi up without eating into its FX reserves.

WHAT CHINA WANTSFor Steve Wang, chief China economist for boutique investment bank Reorient Group, the issue is less about what China can do to keep the currency stable and more about where it wants the currency to be.

"I think China has the tools to keep the renminbi stable for a very long time, so if the renminbi moves, it won’t be because it has ran out of tools but because it wants it to,” he said.

But given the state of the Chinese economy right now, Wang said it is to the country’s bene�t to keep the currency stable and not let it weaken. While it is hard to predict just how long China will keep the renminbi trading in a range, things will only change once the authori-ties deem the economy is in a good-enough state to not require the support.

“It’s obvious that China’s priority right now is to keep its economy stable and for that to happen, the renminbi needs to be stable,” Wang said. “The authorities are probably happy at where the renminbi is right now.”

A§er all, one of the nega-tive impacts of a weakening currency is that it accelerates capital out�ows – something that China has been trying to curb ever since the coun-try came under increased scrutiny over its slowing economy, and with good reason.

China recorded capital out�ows of about $676bn last year, according to data from the Institute for International Finance. In 2014, that �gure was estimated to be only slightly more than $300bn.

And since the end of last year China has gone to extreme lengths to stop money leaving the country. This includes shutting down many outbound investment channels such as the Renminbi Quali�ed Domestic Institutional Investor (RQDII) and Quali-�ed Domestic Limited Partnership (QDLP) schemes. Other measures include limit-ing the supply of US dollars that can be converted at banks and subjecting transfers overseas to greater scrutiny.

Those measures appear to have worked somewhat with capital out�ows falling to $60bn in March, half of what was experi-enced in January.

“It’s not all about curbing out�ows because there’s also another side of the equation, which is to improve in�ows,” Fitch’s head of Asia Paci�c sovereign ratings Andrew Colquhoun said.

Needless to say, China has also been actively trying to do just that with several initiatives such as opening up its inter-bank bond market to allow most foreign investors to invest directly without the need of quotas. But it is likely to be some time before enough investment �ows in to have a meaningful impact.

BUMPS ALONG THE WAYMost market participants Asiamoney spoke with agree with the view that

CHINA FX RESERVES

SOURCE: CLSA; BLOOMBERG

11 12 13 14 15 16

4,100

3,900

3,700

3,500

3,300

3,100

2,900

2,700

2,500

(US$

bn)

RMB FX-r3.indd 11 31/5/16 7:04 pm


RMB FX

China’s main priority right now is to keep things stable. As a result, it is unlikely to risk inducing volatility back to the mar-kets by juggling with the strength of the renminbi too much for the time being.

Yet while China has shown that it is not afraid to use all the tools at its disposal to keep the currency on an even keel, Yang Xuping, general manager and head of greater China marketing group at the Bank of Tokyo-Mitsubishi UFJ says factors outside of China also have to be taken into account.

"The current stabilisation of the ren-minbi is against a backdrop of economic recovery in China and the US Federal Reserve’s dovish stance on US monetary policy,” he said. “US monetary policy holds the key to predicting the future of the currency’s market price. If the Fed changes its stance on monetary policy to hawkish, the renminbi may depreciate again."

Speculation is rife as to when the Fed will make its move to hike interest rates.

While market chatter at the start of the year was predicting three hikes of 25bp each in 2016, the Fed has yet to make a single move. Many market participants are now speculating that there could only be one rate hike of 25bp this year.

If and when the US decides to raise interest rates, Fitch’s Colquhoun agrees that a stronger dollar should in theory cause the renminbi to weaken. When that happens, the PBoC’s reaction will be key.

“Do they start using more of their reserves to keep the renminbi at the cur-rent levels? Do they allow it to weaken a little? Or do they let it weaken according to the dollar’s gains?” he said. “There are a lot of possibilities.”

In his eyes, the PBoC is likely to allow the renminbi to weaken slightly in response to a US rate hike. He estimates that the currency will fall by about 5% by the end of the year.

But action by the Fed is not the only event that could have an impact on the

outlook of the renminbi. Chinese mon-etary policy could also be at odds with efforts to maintain the exchange rate.

Reorient’s Wang explained that while the US is contemplating increasing inter-est rates, China, on the other hand, is in the midst of monetary loosening in a bid to boost its economy.

The PBoC has reduced its benchmark one-year lending rate six times to 4.6% since mid-2014. Other similar measures include lowering the reserve requirement ratio (RRR) for banks. The RRR dictates the amount of cash a lender has to keep locked away so reducing it leads to increased liquidity in the economy.

“The more easing measures China undertakes, the more downward pressure there will be on the renminbi,” Wang said. “It’s a dilemma between boosting economic growth using monetary poli-cies and preventing capital outflows by keeping the currency in check.”

Similar to Colquhoun’s views, Wang said the PBoC is likely to adopt a more

The key to China’s transition to a less managed exchange regime lies in the new methodology to set its daily CNY/USD �x. While at �rst glance the concept seemed easy enough to understand, it has already undergone a number of changes since it was implemented last August.

When China �rst introduced the new regime, its instruction to market makers was that they needed to start taking into account the previous day’s interbank foreign exchange closing prices, the supply/demand dynamics of the market, and movements of other major currencies for their pre-open quotes to the China Foreign Trade System (CFETS).

More guidance came four months later when CFETS published an exchange rate index in December that is based on a basket of 13 currencies including the dollar, euro and yen.

And while the PBoC had not revealed which factors had the most in�uence on the �x, in the �rst few months of the new

system it was clear that a lot of emphasis was being placed on the previous day’s close.

However, things changed in January when the PBoC reacted to the volatility at the start of 2016 by attempting to stabilise the currency. It resorted to keeping the �x steady and ignoring the previous onshore spot closing levels, according to Khoon Goh, senior FX strategist at ANZ.

But the adjustments did not stop there. The PBoC changed things again following the country’s return from the Chinese New Year holidays on February 15, which saw the �x set some 196 pips lower than the previous close.

Several market participants attributed a change of that magnitude to yet another shi§ to the way the �x was being managed. However, in the absence of any explanation from the central bank, market observers were le§ making educated guesses.

Thankfully, the silence lasted only until March when CFETS �nally explained that the �xing regime was a combination of the previous close plus movements of a basket of currencies (see main story) that not only revolves around the CFETS index, but also the Bank for International Settlements (BIS) and Special Drawing Rights (SDR) baskets.

Having three currency baskets provides a better reference to deal with market volatility and is also consistent with market practices, the PBoC explained.

Still, ANZ’s Goh said the way China formulates its daily �xing is still very much up to interpretation and it is unlikely the PBoC’s operational strategies will ever be revealed.

“Perhaps then, the new arrangement for the �xing is to keep the market guessing and to use it more to guide the market, rather than having it being guided by the market,” he said. ◼

THE MYSTERY OF THE NEW FIX

RMB FX-r3.indd 12 31/5/16 7:04 pm


RMB FX

cautious approach to the currency if and when further easing measures are introduced.

That means allowing the currency to weaken slightly while maintaining a tight control on things by using its vast FX reserves as well as continuing its management of capital outflows.

RENMINBI BULLYet while most commentators believe the renminbi is likely to remain fairly stable or decline gradually, there are some who think it is bound for the opposite direction.

One such bull is Andy Seaman, chief investment officer for London-based Stratton Street.

And unlike the rest of the street, he expects the renminbi to start appreciat-ing this year. He is also keen to point out that there is no clear linkage between currency strength and a country’s eco-nomic growth.

“Net foreign asset is the single biggest driver of FX, not GDP growth,” he said. “Countries with a big current-account surplus tend to have a strong currency

such as Singapore and Switzerland, so the renminbi should fundamentally be strong as well.”

China’s foreign debt and current-ac-count surplus stood at $293bn last year, which was the largest in the world.

In his counterargument, Seaman explains that under the CFETS index weighting which is used to inform the daily fix, the four largest currencies are the US dollar (26.4%), euro (21.4%), Jap-anese yen (14.7%) and Hong Kong dollar (6.6%) (see chart above).

But with the US dollar highly expected to strengthen and the Hong Kong dollar pegged to the greenback, it would require huge swings in the euro and the yen in order for the renminbi to weaken — nei-ther of which is likely to happen.

While he agrees that US and Chinese monetary policies are headwinds for the renminbi, there are also potential tailwinds for the currency such as the possible inclusion of A-shares in major global indices such as the MSCI (see story on page 16).

When that happens, almost every investor globally would find their China

portfolio massively undersupplied and the easiest fix to that would be to buy into the renminbi, which will push the currency up.

“I think the renminbi is very underval-ued and is likely to appreciate for many years to come,” Seaman said. “It could double in value over the next decade.” ◼

CFETS RENMINBI INDEX WEIGHTING

SOURCE: HTTP://WWW.CHINAMONEY.COM.CN/FE/INFO/15862951

JPY – 14.7%

USD – 26.4%

NZD – 0.7%CHF – 1.5%

CAD – 2.5%

THB – 3.3%

SGD – 3.8%

GBP – 3.9%

RUB – 4.4%

MYR – 4.7%

AUD – 6.3%HKD – 6.6%

EUR – 21.4%

ANDY SEAMANStratford Street.

RMB FX-r3.indd 13 31/5/16 7:04 pm


RMB Internationalisation

Cross-border �ows have always been a key part of the renminbi globalisation story. The ability to use the currency widely has

been one of the strands underpinning Beijing’s strategy. However, the emphasis was always clearly on creating avenues to encourage and generate o�shore renminbi liquidity while controlling the �ow of money that made its way back into the country.

All that changed when a sharp devaluation in the FX last summer followed by an extended period of depreciation in the currency, caused a

record amount of capital to leave the country. Since then China has shi�ed direction with the emphasis clearly on encouraging in�ows from global investors.

New initiatives have included providing access to the onshore FX market and the bond market has been a particular focus. Most recently, Shanghai announced plans to launch an o�shore renminbi (CNH) bond market in its Free Trade Zone.

But the most game changing move was the decision in February by the People’s Bank of China to open up the

China interbank bond market (CIBM) by allowing almost all types of foreign real money institutional investors to directly invest without a quota.

O�cial guidelines are still yet to be published but there is no doubt that the decision counts as one of the most signi�cant steps towards liberalising the country’s capital markets. Moreover, far from being a backward move, encouraging more in�ows into the Mainland is viewed as a necessary next step towards renminbi internationalisation.

“You are seeing a measured and structured

two-way opening up of the capital account and the regulators want to involve international investors in the onshore capital market,” said Cian Burke, global head of securities services at HSBC.

“Currently, a quota is not a limiting factor to inbound investment. However, if the A-share is included into the MSCI emerging market indices or the CIBM becomes part of global bond investment indices, then investment in�ows will be impacted,” said Burke.

This view is echoed by Lisa O’Connor, head of securities services, transaction banking, greater China and North Asia, at Standard Chartered.

“I would expect the regulators to continue to make all the schemes as user friendly as possible,” she said. “Many of the changes we are seeing under both Shanghai-Hong Kong Stock Connect and CIBM are driving the consideration of including China into key indices which is an expected longer term goal.”

And positioning for a future pick-up in inbound investment was one of the issues the PBoC highlighted when it made the announcement to open up the CIBM. At the time the central bank said it believes the scheme could “accommodate rising demand for RMB �xed income assets by global institutional investors following the inclusion of the RMB in the International Monetary Fund's SDR basket last November.”

Welcome, you are now entering ChinaChina’s e�orts to promote the renminbi have been focused on getting the currency out into the world. But since last year there has been a noticeable shi�, with Beijing ratcheting up attempts to entice the world into its domestic markets. A new phase of renminbi internationalisation has begun, writes Carrie Hong.

CIAN BURKEHSBC.

RMB Internationalisation-r3.indd 14 31/5/16 6:06 pm


RMB Internationalisation

CHALLENGES AND CHANCES However, if China’s long-term goal remains making the renminbi a global currency, regulators really need to consider removing some of the current suspensions of outbound channels. Since the end of last year, Beijing has systematically shut down programmes that allowed renminbi to �ow o�shore as it sought to stop the currency devaluing.

In November, the PBoC banned cross-border lending, onshore bond purchases and interbank repo transactions between the onshore headquarters of Chinese banks and their o�shore clearing entities/branches.

The contraction of o�shore schemes then moved to imposing a reserve requirement ratio on o�shore renminbi deposits and suspending two-way cash pooling services. Finally, this year saw the suspension of the renminbi quali�ed domestic institutional investor (RQDII) and QDII schemes.

“There is a chance this could back�re as the focus is all about investing money into China in an environment where it is becoming extremely di�cult to get money out,” said a RQFII portfolio manager with a Chinese �rm based in Hong Kong.

“Some of my clients’ decisions to redeem their investment is over concerns about the regulatory uncertainty.”

This should be a concern for regulators as foreign holdings of Chinese assets remain minimal for now.

“The amount of international investors is still relatively small compared with the total opportunities that exist within China,” said HSBC’s Burke. “The onshore market is still very unfamiliar to many foreign investors."

And it looks likely to stay that without a catalyst to trigger substantial inbound investment, argues Pierre Humblot, COO �xed income Asia Paci�c and COO global emerging market debt at JP Morgan Asset Management.

“There is a lot more interest nowadays in accessing China, but the real desire to invest will only really happen when China is included in one of the global bond indices,” he said. “That would de�nitely be the trigger for the China onshore market to develop further, as you

will see passive institutional investors allocating their portfolio into China.”

THE ROAD LESS TRAVELLEDOnce investors have decided to take the plunge, the question is then which route do they take to enter China.

Before the recent relaxation of rules regarding investing in the CIBM, there were only two inbound channels for onshore bond investment: the qualified foreign institutional investor (QFII) and renminbi QFII schemes which work on a quota based system.

Under the RQFII scheme, any manager that wanted to invest in China’s domestic bond market first had to wait for the jurisdiction where they were based to receive a country level quota from the PBoC. Then they would need to apply for a RQFII licence from the China Securities Regulatory Commission (CSRC) and then to receive an individual quota from State Administration of Foreign Exchange (Safe).

Since Hong Kong received the first RQFII licence in late 2011, the PBoC has awarded quotas worth Rmb1.2tr ($184bn) but of that only Rmb480bn has been allocated, according to GlobalRMB data.

The lengthy and complicated nature of the quota-based scheme means the CIBM opening has been broadly welcomed. But as O’Connor notes, one the key questions is how it might change the view of the existing investment programmes.

“In the past, the RQFII programme was used more for CIBM investment, but with the new direct access in place, it now really depends on what you’d like to achieve as an investor and then to base your strategy around the options,” she said.

“QFII/RQFII would still be attractive to those who want more than cash bond exposure, which is what the CIBM access o�ers at the moment. To those who invest in equities or have more of a mixed

portfolio, these two schemes still have their advantages.”

That said, some existing QFII and RQFII portfolio managers are worried that the two programmes could get side-lined.

“I’m losing some clients at the moment as they have been granted direct access to interbank bonds, not to mention the new channel seems to provide more efficient and simplified investment procedures,” said the RQFII portfolio manager.

But any debate about which scheme is better will count for nothing if China cannot convince investors that its markets are trustworthy and that the Chinese economy is not heading for a hard landing. HSBC’s Burke recognises the challenge but believes China is on the right path.

“There are still concerns about the currency depreciation or changes in the broader investment landscape. For example, the volatility in the A-share market since last summer is still giving investors reason to continue to review the market,” said Burke.

“There will be short-term challenges, in terms of a slowing Chinese economy, but corporate governance is becoming stronger and transparency of what you are investing in is also improving,” he added. ◼

LISA O'CONNORStandard Chartered.

RMB Internationalisation-r3.indd 15 31/5/16 6:06 pm


RMB Indices and Investing

Even before Chinese equity markets were hit with turbulence last year, there were good reasons why for-eign ownership of Chinese stocks

had remained low. Around 80% of inves-tors in the world’s second biggest equity market by capitalisation are retail, making it unpredictable at the best of times. Add to that the di�culty in gaining access via arcane quota schemes and no wonder global investors have kept their distance.

Then the events that unfolded over the summer seemed to con�rm the worst fears about the Chinese market. The Shenzhen and Shanghai exchanges went on a roller-coaster ride, with the Shanghai Composite Index (SHCOMP) surging to touch the record level of 5,166 points on June 12, 2015 before collapsing all the way to 2,655 points just six months later.

The killer blow to foreign investors’ con-�dence, however, was the decision by the People’s Bank of China (PBoC) to reform its daily �xing mechanism for the onshore RMB (CNY) against foreign currencies on 11 August 2015. That decision brought to an end a multi-year trend of RMB appreci-ation, with the CNY since losing 4.6% of its value against the dollar.

“The A-shares market last year went to extraordinary valuations and it had not been on the global investor radar until it moved so much,” said Luke Spajic, head of portfolio management, emerging Asia, Pimco. "Second was the currency e¥ect, when the RMB moved it made all risk asset

classes follow, and the China story from a macro perspective became much more important."

The combination of the two trends has given global investors quite a scare. Yet, entering the second quarter of 2016, with the RMB stabilising against the dollar and A-shares somewhat less volatile, the inclusion of Chinese equities in global portfolios is once again being discussed.

In a March 31 launch of a new ‘inclusion roadmap’, MSCI said it would seek market feedback on how recent reforms intro-duced by China’s regulators had addressed concerns about the accessibility of the market. It follows its decision in June last year that A-shares were not ready to join its emerging market indices despite Bei-jing making progress. One of the critical issues is the availability of investment quotas.

As it stands, investors can only access the China market under speci�c schemes, such as the quali�ed foreign institutional investor (QFII) programme or the Shang-hai-Hong Kong Stock Connect. As a result, index providers have to consider whether the total amount of quotas available under these are su�cient to meet the demand for A-shares deriving from whatever initial weighting the asset class is given in their emerging market index products.

Marco Montanari, head of passive asset management, Asia Paci�c, Deutsche Asset Management (DAM), says the �rm’s A-shares products use indices by onshore

provider China Securities Index (CSI), such as the one backing the Deutsche X-trackers Harvest CSI 300 China A-Shares ETF. The ETF is the fourth exchange traded fund (ETF) globally investing in Chinese equities, with assets under management (AUM) of $415.7m as of April 20, according to Bloomberg data.

Montanari noted CSI’s standing in China and the availability of related futures had determined its choices so far.

“We took a decision to work with CSI because of a combination of reasons, including CSI's leading position in China, and the related derivatives available,” said Montanari. "At the moment there is no plan to change [index provider] but as the situation and what the clients want evolves, we will keep doing what is in best interest of the investors."

A THORNY ISSUEA more serious problem is the stock sus-pensions on Chinese exchanges last year. During the worst of the equity rout in the summer of 2015, hundreds of companies chose to self-suspend their stocks from trading.

Generally, stock suspensions rules aim to prevent speculative trading when a company is closing an M&A transaction or going through restructuring, but as a result of fuzzy rules in the Chinese secu-rities market, �rms used suspension as a tool to make themselves immune from col-lapsing stock values, at least temporarily.

A-shares: coming to an index product near youIndex providers are once again discussing the potential inclusion of A-shares with global investors. But despite the best e�orts by China’s regulators to ready the country’s �nancial system, market participants remain divided about whether recent steps go far enough, writes Paolo Danese.

RMB Indices-r3.indd 16 31/5/16 6:07 pm



“Suspensions a¥ected a lot of stocks and a big percentage of the market. That is a situation that concerns a lot of investors,” said Anthony Yau, head of Asian EM active equity at State Street Global Advisors (SSGA). “Now there is talk of the regulators limiting suspensions to three months, but there is need for a solid framework. Timing-wise, regulators have a high interest to push this forward, there is engagement with exchanges and listed corporates."

FTSE, which runs the FTSE China A50 index comprising the 50 largest companies on the Shanghai and Shenzhen stock exchanges, told Asiamoney that the degree of concern among both investors and index providers was justi�ed by how widespread the suspensions had become.

"Three stocks in the FTSE China A50 index were sus-pended, and on a broader universe the suspension was more severe,” said Jessie Pak, managing director for Asia at FTSE Russell. “During the most extreme period, some 40% of constituents in the CSI 300 were suspended. From that perspective, it can signi�cantly impact the liquidity in the market. We feel that China needs to review its regulation in this area to ensure it’s harder for companies to self-suspend.”

Other market participants familiar with the MSCI review, however, o¥ered a di¥erent view noting that from an o¥shore perspective, not all market participants had been equally a¥ected by the issue.

"Suspensions have been disruptive for investment banks in their hedging activi-ties,” said Guillaume Derville, head of Asia Paci�c equity and derivative strategy at BNP Paribas. “Real money investors – pension funds and asset managers – seem to be less concerned with last summer’s suspensions and understand that China remains an emerging market.”

ONE STEP FORWARD, TWO STEPS BACK?The message seems to be getting through with Chinese regulators showing commit-

ment to make the reforms identi�ed in the index providers’ reviews.

For example, in February the State Administration of Foreign Exchange introduced streamlined rules for the QFII scheme and a new system that automati-cally grants quotas to licensed �rms based on their AUM and for up to a maximum of $5bn. Previously, asset management �rms had to apply for multiple quota allowances, with an upper limit of $1bn, through a lengthy process via two di¥erent Chinese regulators.

FTSE’s Pak agreed that the recent QFII reform was an important step, adding that the index provider was moving forward with its 2016 country classi�cation review to potentially expand the 5.6% weighting it gave A-shares last year in its FTSE Emerg-ing Markets All Cap China A Inclusion Index.

“The recent QFII enhancements will help to provide bigger quotas to inves-tors according to their size," said Pak. "However, we are still hoping to get some additional clarity on its implementation. For example, some clients are asking us, if they have multiple QFII quotas under di¥erent entities, what can be done to get

the biggest quotas possible under the new rules."

While clients �gure out individual strategies to maximise access via the quota system, the index provider had concerns of its own.

"We believe that it is important to have a framework where Chinese regulators can inform the market on the quotas for each �rm since the quota size is an essential factor in calculating index weightings. It would be helpful to have transparency on how big the total quota is," she said.

An expansion of the Stock Connect scheme, launched in November 2014 to allow direct trading of a select pool of stocks on the Hong Kong and Shanghai exchanges, is seen as another missing piece of the puzzle. Market participants agree that a broader set of tradable shares, and its expansion to include Shenzhen — which is expected to happen later this year — could in©uence the outcome of the index providers’ review process.

"Our research previously said there is a higher probability of a positive decision this year but for inclusion next year,” said DAM’s Montanari. “My personal view is that if the Shenzhen Connect is announced

MSCI DOMINANCE IN EM EQUITY INDICES

SOURCE: BLOOMBERG

MSCI Daily Total Return Net Emerging Markets Index – US$42,491m

MSCI Emerging Markets Index – US$837m

FTSE Emerging Index – US$1,705m

FTSE RAFI Emerging Markets Index – US$32m




it would be more likely that the inclusion happens."

SSGA’s Yau said that broadening access to the Shenzhen-listed stocks could indeed be a turning point also for the MSCI review, but noted that technical issues remained.

“When launched Shenzhen Connect will complete the puzzle of access to China A-shares,” he said. "That will be a mile-stone. But in terms of the entire Stock Connect programme, even when completed, the mechanism of daily [net trading quota] limit is still an ongoing issue for global investors.”

Although the existing daily net trading limit on Stock Connect — Rmb13bn ($2bn) for A-shares trades —has rarely been reached, the amount would be too small to cope with any degree of global demand once A-shares are included in the indices.

“Any daily limit will be set up to fail at a critical point when liquidity is really needed,” Yau warned.

READY OR NOTAcross the market, the expectation is that MSCI is likely to give A-shares the nod this year, with the actual inclusion going live in May 2017. The proposal is for a 5% initial inclusion factor based on market capitalisation and the existing limit of 30% ownership for foreign investors of domestic stock, which would translate to A-shares having an initial 1.1% weighting in the MSCI EM Index (see charts opposite).

Despite the seeming inevitability, some remain unconvinced that the timing is right.

“There is a very big debate surrounding the timing of the MSCI decision and the initial scale of China’s share on entry to any index,” said Pimco’s Spajic. "FTSE expects some of the funds and investors to adopt its parallel indices, but it takes some time to attract assets. Investors need to know how to put money in and get it out with ease, and all the issues around capital market development in China need to be clari�ed.”

Jay Lee, a Hong Kong-based capital markets partner at law �rm Simmons & Simmons told Asiamoney that concerns ulti-mately came down to how regulators would avoid a repeat of last summer’s panic. As a worrying side e¥ect, the wide usage of stock suspensions was accompanied by govern-ment agencies increasingly stepping in with heavy purchases of blue-chip stocks to try to prevent a full meltdown.

“Index providers would need to consider whether or not there will be so much govern-ment intervention and control over the stock markets in the coming years,” said Lee.

Ultimately, Spajic urged index providers to carefully consider the impact their deci-sion would have on investors.

"There is a major rush to jump to conclusions, but index providers need to go through the moves, they need to think about clearing, settlement, counterparty risk, they need to think about all the quirks in this market. The decision has to

be driven with the end investor in mind."

In terms of the quirks, MSCI has noted that more clarity is also needed on issues such as the bene�cial ownership rights of asset owners that delegate investment to fund managers, and anti-competitive clauses put in place by stock exchanges governing the launch of index products linked to shares listed on their boards.

On May 6, the China Securities Regulatory Commission (CSRC) addressed the �rst issue, stating that regulators

recognise the bene�cial ownership rights of foreign investors that use nominees under the QFII and renminbi QFII schemes. CSRC added that the rules applicable to inves-tors and asset managers are those of the jurisdictions where the investment contract is entered into and not mainland China, adding that Chinese authorities would respect such arrangements. In May 2015, the regulator clari�ed that bene�cial own-ership was recognised for those investing through the Stock Connect scheme.

And the point regarding anti-competitive clauses is also being discussed by index providers, local exchanges, and the regu-lators, although there is a sense that the issue relates more to business negotiations between exchanges and index providers rather than a real regulatory roadblock.

THE ‘YES’ SCENARIOEven with a positive decision by MSCI, analysts are expecting resulting investment ©ows to be modest, at least at �rst. BNP Par-ibas’s Derville said his team had estimated initial active ©ows of around $9.9bn and passive ©ows of just $1.4bn.

"Our bet is that there is a non-negligible change, which could be above 50%, that MSCI announces in June that inclusion will be implemented in May 2017," Derville said. "I think what is important to highlight is that it is not about if but when. Our conviction is that this will happen in the next 18 months."

A-SHARES HELD BY OVERSEAS ENTITIES

SOURCE: CEIC; PEOPLE'S BANK OF CHINA

900

800

700

600

500

400

300

200

100

0

Rmb

bn

Jan14 Mar14 May14 Jul14 Sep14 Nov14 Jan15 Mar15 May15 Jul15 Sep15 Nov15 Jan16 Mar16




Overall, investors agree that actual investment ©ows will depend as much on index inclusions as on the broader outlook on China’s economy.

“My clients always say that getting access is not a problem if there is an inter-est,” said DAM’s Montanari. "The macro aspect will dominate every kind of tech-nical consideration. If investors believe in the China economy, that the currency will appreciate and not depreciate, and see that reforms are implemented, then no doubt investors will come back via Shang-hai Connect or whatever instrument.

“It is going to happen in the same way that in the past they were getting expo-sure even synthetically when it was much more di�cult.”

The fact remains that a $10tr economy is still largely absent from global invest-ment portfolios. Transitioning China assets to their deserved roles will take years, but it will be bene�cial for both sides.

For global investors, it will mean gain-ing direct exposure to what still is, despite the recent slowdown, one of the world’s fastest growing economies. For China, the bene�ts will be across many levels, from changing the composition of its investor base away from retail investors thanks to the greater involvement of global insti-tutional investors, to promoting capital in©ows that will counter capital ©ight and stabilise the value of its currency.

On top of that, as a signal of the broader integration of China into the global �nan-cial system, there is also the expectation that the review process will signal a new phase of domestic market reform with Chinese authorities bringing it more in line with international standards.

“This is the start of a multi-year pro-cess. Now is a good opportunity to build a stronger dialogue and create a process with the Chinese regulators to �gure out how to handle the most di�cult issues. Last year was the critical start of that process,” said Spajic.

With the Chinese authorities still stand-ing by their commitment that the country will see the full opening of its capital account by 2020, the index inclusion process seems set to play a crucial role in achieving the target. ◼

CURRENT COMPOSITION OF THE MSCI EM

NOTE: (*) NEXT TO CHINA STANDS FOR MSCI CHINA (H-SHARES, RED CHIPS, P-CHIPS AND OVERSEAS SHARES)SOURCE: MSCI

China (*) – 25.9%

Korea – 15.2%

Taiwan – 12.0%India – 7.9%

South A£ica – 7.1%

Brazil – 6.5%

Mexico – 4.5%

Russia – 3.6%

Other – 17.4%

WITH AN INCLUSION FACTOR OF 5%


China (*) – 26.2%

Russia – 3.6%

China A – 1.1%

Korea – 14.9%Taiwan – 11.8%

India – 7.7%


Brazil – 6.4%

Mexico – 4.4%

Other – 17.0%

WITH AN INCLUSION FACTOR OF 100%


China A – 18.2%Other – 14.1%

China (*) – 21.7%

Russia – 3.0%Mexico – 3.6%

Brazil – 5.3%


India – 6.4%

Taiwan – 9.7% Korea – 12.3%



Offshore RMB Poll

HSBC has claimed the top spot in Asiamoney’s Oshore RMB poll for the ��h year in a row in a result that saw it extend its lead over its

rivals.This year’s poll was the largest and most

competitive with Asiamoney receiving 2,009 valid responses from corporates, �nancial institutions and investors, a massive 57% increase from last year.

While HSBC managed to win with an impressive margin, the competition for second place was a close run battle (see full poll result). Standard Chartered managed to hold o challengers to retain its second place. Meanwhile, Bank of Tokyo-Mitsubishi UFJ, the banking arm of MUFG, put in an impressive performance to move two places up the rankings into third positon, its high-est since the poll began in 2012.

HSBC is certainly not resting on its laurels. The internationalisation of the renminbi was highlighted as one of the bank’s key busi-ness areas in its June 2015 strategic review and it is targeting to generate income of $2.5bn from it by 2017. For Candy Ho, global head of RMB business development at HSBC, the bank’s success has been making sure clients have the tools they need to deal with unexpected events including the surprise plunge of the renminbi in August.

“The August 11 depreciation of the cur-rency was a major game changing event and although we could not predict the date, as a house we had been calling for deprecation for some time,” she said.

“We have been educating and informing clients on that view and putting in place

hedging strategies for them so when the depreciation took place I think a lot of clients were quite grateful for the advice we had given them.

“We act as a bridge between what China’s policies mean and what are the implications for our customers and I think clients are appreciative of that.”

For Standard Chartered, this link between clients and China is also key to its oering.

“One of the important things is how to navigate the changing regulatory envi-ronment in China and thanks to our long history in China we are very close to the regulator and so we can make sure we are conveying the right message to clients,” said Carmen Ling, managing director and head, RMB solutions at StanChart.

“This is not an easy time to be managing FX volatility and trapped cash. Clients don’t just look for information on renminbi, they want to know about how what is happening in China relates to their business.”

And despite the renminbi international-isation project being around for a number of years, client demand for information remains as high as ever, says Xuping Yang, general manager and head of the Greater China marketing Group at BTMU.

“Customer education is still a very important part of our initiatives and we are de�nitely seeing the pay-o for our eorts over the long term,” he said

Toshihide Motoshita, BTMU’s executive o�cer and regional head for Hong Kong, added: “We have over 1200 o�ces outside of Japan and in key areas like New York, Brazil, London and Singapore, we have appointed experts who are responsible for staying close to what is happening in China and Hong Kong. They provide local support to the other relationship managers. We make sure there is local expertise as relationship managers cannot always call Hong Kong and China.”

Lower down the poll there was also plenty of change. Risers included Mizuho, which moved up two places to sixth place. DBS also gained, rising from ninth to sev-enth. Meanwhile, Citi slipped from third to joint eighth with Hang Seng Bank. In addition, Bank of China (Hong Kong) and Bank of China were counted as separate entities for the �rst time. Both still ranked highly, coming in at fourth and ��h place respectively.

Five in a row for HSBC in Asiamoney O�shore RMB Poll Asiamoney’s O�shore RMB Poll handed victory to HSBC for the ��h year running in the survey’s largest outing yet, with Standard Chartered and BTMU runners up. The top three discuss their approach and expecta-tions for RMB internationalisation in 2016. Lorraine Cushnie reports.

CANDY HOglobal head of RMB business development at HSBC.

Offshore RMB Poll Results-r2.indd 20 31/5/16 6:08 pm


Offshore RMB Poll

CHANGING GEARDespite the uncertainty and turmoil caused by concerns over Chinese economic growth as well as the fallout from last year’s sharp fall in the currency, banks are not reporting any reduction in interest for renminbi services.

However, there is a recognition that the pace of reform has slowed and that this may remain the case until there is an ongoing period of stabilisation. This should not be a cause for surprise or alarm, says StanChart’s Ling.

“When you’re driving a car and the road is smooth, you can drive at full speed, but when the road is bumpy you need to stabilise the car before going ahead at full speed again,” she said.

But even if renminbi reform takes place in third gear rather than ��h, market observers are still expecting plenty of cru-cial developments to take place this year.

One important change will be a greater focus by Chinese authorities on capital markets.

“If we go back to the roadmap, the plan is to have renminbi used as a trading currency, an investment currency and a reserve currency,” said Ling. “Use of renminbi as trade and reserve currency are pretty much set, especially now that renminbi will join the SDR later this year, so the one that’s missing is investment. Renminbi now needs to be a �nancing currency. ”

The rise of renminbi as investment currency is also important for HSBC’s Ho who terms it the integration of China’s capital markets. She points out there is already evidence of this happening such the announcement in February that the China interbank bond market is now open to long-only institutional foreign investors. Other initiatives include allowing more foreign participation in the onshore FX market. Getting the equity trading link between Shenzhen and Hong Kong up and running, to add to the one between Shanghai and Hong Kong, is another important milestone.

“Another big step for integration would be the inclusion of A-shares in MSCI indi-ces. But one big hurdle to that happening is Shenzhen-Hong Kong Stock Connect,” said Ho.

“Typically MSCI reviews its indices mid-year so while there might not be enough time to launch the Shenzhen connect before then, we are expecting some formal guidelines and timing to be announced this year.”

Ho says there is a recognition by the Chi-nese authorities that opening up its capital markets will bring help bring about some of the much needed stability.

“I think they realise that if you want the renminbi to be an international currency, you need it to be more accessible to the inter-national market and that these initiatives will help stabilise and neutralise capital out-

¤ows. That is the kind of polices we expect to see this year.”

THE AMERICANS ARE COMINGOf course the biggest con�rmed event taking place in 2016 is the renminbi’s inclusion in the IMF’s Special Drawing Rights basket in October. The entry is expected to increase demand for renminbi assets, with BTMU predicting $220bn additional buying over the next �ve years or so.

“With the renminbi joining the SDR basket we're expecting more foreign investors to demand renminbi bonds if the currency is stable. I think this stabilisation is now what we are gradually seeing,” said Kennis Wong, executive director and head of Greater China debt capital markets at the securities arm of MUFG.

China’s Belt and Road project is also stepping up and should provide huge opportunities for renminbi �nancing due to its emphasis on infrastructure projects. Panda bonds, onshore renminbi debt sold by foreign issuers, is also attracting plenty of attention although it too suers from the ambiguity around some of the rules.

“We certainly see a lot of interest in the Panda bond market from our foreign clients. We have done a roadshow providing up-to-date information on the market and the regulations are still not very clear right now but we think this will come soon,” said MUFG’s Wong.

More unexpectedly, one of Ho’s predic-tions for this year is for the United States to be the country to watch in terms of oshore renminbi development. While there has always been some participation by the corporate sector in terms of using the currency for trade, more generally American institutions have been wary. In part this is because the renminbi is a sensitive political issue in the US where China has regularly been called a currency manipulator. But that could be about to change.

“The institutional investor space is where it was lacking because fund managers in the US don’t have RQFII quotas. But now with the CIBM opening up and discussions by the index providers about adding Chinese bonds I think big US money market funds will start to look at accessing China’s onshore bond market,” she said. ◼

CARMEN LINGmanaging director and head, RMB solutions at Standard Chartered.

TOSHIHIDE MOTOSHITABTMU's executive o�cer and regional head for Hong Kong.



Offshore RMB Poll

The best banks for RMB products by category (as voted by current o�shore RMB services users)

2016 2015 Firm % 1 1 HSBC 37.85 2 2 Standard Chartered 16.59 3 5 Bank of Tokyo-Mitsubishi UFJ 16.02 4 - Bank of China (Hong Kong) 6.17 5 4 Bank of China 3.40 6 8 Mizuho 1.83 7 9 DBS 1.70 =8 3 Citi 1.46 =8 6 Hang Seng 1.46 10 7 ICBC 1.22

Best overall o�shore RMB products/services

2016 2015 Firm % 1 1 HSBC 35.08 2 2 Standard Chartered 15.19 3 5 Bank of Tokyo-Mitsubishi UFJ 14.69 4 - Bank of China (Hong Kong) 7.22 5 4 Bank of China 6.14 6 8 ICBC 2.11 7 3 Citi 1.73 8 9 Mizuho 1.62 9 7 China Construction Bank 1.48 10 10 DBS 1.44

Best for o�shore RMB bond origination

2016 2015 Firm % 1 1 HSBC 34.85 2 5 Bank of Tokyo-Mitsubishi UFJ 16.91 3 2 Standard Chartered 15.62 4 - Bank of China (Hong Kong) 6.51 5 4 Bank of China 4.36 6 8 Mizuho 2.28 7 3 Citi 1.73 8 9 DBS 1.62 9 6 Hang Seng 1.60 10 7 ICBC 1.52

Best for o�shore RMB foreign exchange

2016 2015 Firm % 1 1 HSBC 35.24 2 2 Standard Chartered 17.02 3 4 Bank of Tokyo-Mitsubishi UFJ 16.27 4 - Bank of China (Hong Kong) 5.75 5 5 Bank of China 3.69 6 7 DBS 2.04 7 10 Mizuho 1.82 8 6 Hang Seng 1.57 9 3 Citi 1.41 10 8 ICBC 1.31

Best for o�shore RMB derivatives

2016 2015 Firm % 1 HSBC 35.71 2 Standard Chartered 17.43 3 Bank of Tokyo-Mitsubishi UFJ 16.16 4 Bank of China (Hong Kong) 6.28 5 Bank of China 3.89 6 DBS 1.73 7 Mizuho 1.66 8 Citi 1.62 9 Hang Seng 1.51 10 Bank of Communications 1.27

Best for o�shore RMB wealth management

2016 2015 Firm % 1 1 HSBC 34.80 2 5 Bank of Tokyo-Mitsubishi UFJ 15.79 3 2 Standard Chartered 14.71 4 - Bank of China (Hong Kong) 7.99 5 3 Bank of China 5.59 6 6 ICBC 2.03 7 9 Mizuho 1.85 8 4 Citi 1.76 9 10 DBS 1.45 10 7 Hang Seng 1.43

Best for o�shore RMB clearance, transaction banking and settlement

2016 2015 Firm % 1 1 HSBC 35.08 2 2 Standard Chartered 16.78 3 5 Bank of Tokyo-Mitsubishi UFJ 16.61 4 - Bank of China (Hong Kong) 6.02 5 4 Bank of China 4.16 6 =9 Mizuho 1.82 7 7 Hang Seng 1.66 8 3 Citi 1.62 9 =9 DBS 1.55 10 6 ICBC 1.51

Best for o�shore RMB �nd investment

2016 2015 Firm % 1 HSBC 35.27 2 Standard Chartered 16.91 3 Bank of Tokyo-Mitsubishi UFJ 16.38 4 Bank of China (Hong Kong) 6.51 5 Bank of China 4.31 6 Mizuho 1.64 7 Hang Seng 1.62 8 ICBC 1.56 9 Citi 1.53 10 DBS 1.36

Best for o�shore RMB �nd services(i.e. custodian and trsut services)



Offshore RMB Poll

O�shore RMB Poll 2016 – MethodologyAsiamoney’s 5th Oshore RMB Poll assessed the best oshore RMB service providers across the Asia-Paci�c region. Existing users of oshore RMB services, such as corporates, �nancial institutions and investors, were invited to participate in this survey. A total of 2,009 valid responses were received across various industries.

The percentage breakdown of jurisdictions is as follows: The percentage breakdown by industry of existing users is as follows:

China: 26.93%

Korea: 0.80%Malaysia: 2.04%

Thailand: 0.45%

Singapore: 2.19%

Other: 2.99%

Japan: 0.55%

India: 0.30%Hong Kong: 49.18%

Australia: 0.65%

Taiwan: 13.09%IT/so�ware: 2.51%

Real estate: 2.12%

Banking: 5.58%

Other �nancial institutions (�nancial services, insurance, securities company, etc): 7.53%

Manufacturing: 29.89%

Business service: 4.57%

Transportation: 2.40%

Trading/wholesale/retail: 34.63%

Other non-�nancial institutions (construction, food & beverages, health-care, etc): 10.76%

2016 2015 Firm % 1 1 HSBC 33.81 2 5 Bank of Tokyo-Mitsubishi UFJ 16.67 3 2 Standard Chartered 15.65 4 - Bank of China (Hong Kong) 6.95 5 4 Bank of China 4.48 =6 9 Mizuho 1.74 =6 6 ICBC 1.74 8 10 DBS 1.65 9 7 Hang Seng 1.49 10 3 Citi 1.48

Best for o�shore RMB liquidity management(e.g. deposits, cross-border concentration/pooling)

2016 2015 Firm % 1 1 HSBC 36.22 2 4 Bank of Tokyo-Mitsubishi UFJ 16.95 3 2 Standard Chartered 16.72 4 - Bank of China (Hong Kong) 5.28 5 5 Bank of China 3.89 6 3 Citi 2.02 7 10 Mizuho 1.98 8 8 DBS 1.51 9 6 Hang Seng 1.22 10 - SMBC 1.18

Best for o�shore RMB research

Respondents were asked to nominate their top three services providers for the following categories:• Best overall oshore RMB products/services • Best oshore RMB clearance, transaction banking and settlement• Best oshore RMB bond origination• Best oshore RMB fund investment• Best oshore RMB liquidity management (e.g. deposits, cross-border

concentration/pooling)• Best oshore RMB derivatives • Best oshore RMB research• Best services for oshore RMB foreign exchange

• Best advice/information on oshore RMB regulations• Best oshore RMB wealth management• Best oshore RMB fund services (e.g. custodian and trust services)

In these categories, a �rst place ranking was awarded three points, second place two points and third place one point.

To avoid any one institution having more in¤uence than others of equal size, multiple responses were fractioned according to the total number received from that one institution.

2016 2015 Firm % 1 HSBC 35.50 2 Bank of Tokyo-Mitsubishi UFJ 17.17 3 Standard Chartered 17.08 4 Bank of China (Hong Kong) 5.76 5 Bank of China 3.80 6 Mizuho 1.96 7 Citi 1.86 8 DBS 1.66 9 Hang Seng 1.37 10 ICBC 1.27

Best for advice/information on o�shore RMB regulations

The Philippines: 0.10%

Indonesia: 0.55%


Coverage of the RMB market straight from Hong Kong• Primarydimsumbondissuance

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www.globalcapital.com/rmb @GlobalRMB

For access contact: +852 2842 6994 | [email protected]

Global RMB A4 flyer.indd 1 4/12/14 10:24 pm


Offshore RMB Poll

Ten questions forthe RMB marketFor the second year running, our O�shore RMB Poll surveyed participants on some of the most important topics related to the renminbi’s globalisation. Around 1,600 responses were received — a 60% jump on last year — with those polled giving their views on subjects ranging from Panda bonds to currency depreciation. Lorraine Cushnie reports on the �ndings.

WHAT WILL BE THE VOLUME OF PUBLIC SYNDICATED OFFSHORE RMB BOND ISSUANCE IN 2016? (2015: Rmb111bn excluding MoF auctions) (Total responses: 1,509)Considering last year’s steep fall in o�shore renminbi bonds it is hardly surprising that respondents are far more bearish on the outlook for dim sum debt in 2016. When Asiamoney asked this question in 2015, the majority (43%) thought volumes would be Rmb200bn, followed by 35% at Rmb250bn and 22% picking Rmb150bn. But since then the market has faced tougher conditions and volumes fell 46% year-on-year in 2015 and at the time of writing there had only been one public syndicated o�shore RMB bond this year. The market has been

bu�eted by a number of headwinds. Last August’s surprise devaluation of the currency and the subsequent volatility and uncertainty about future policy direction has deterred both issuers and investors. Adding to that is the fact that funding in onshore renminbi is much cheaper which means the Chinese companies that made up the bulk of issuers are choosing to raise debt domestically. What funding there has been in o�shore renminbi has largely been con�ned to private transactions and bank-ers say this trend looks likely to persist.

<Rmb150bn (45%)

WILL CHINA WIDEN THE RMB'S TRADING BAND IN 2016? (Current +/-2%) (Total responses: 1,652)Last year’s high expectations that the trad-ing band would be widened appeared to be justi�ed when in July the State Council announced that it was planning to expand the range in which the renminbi could trade. The proposal was viewed as part of China’s strategy to get the renminbi into the IMF Special Drawing Rights basket. But instead, one month later came the August 11 devaluation and since then discussions have moved away from band widening. None of that has been enough to change the mind of our respondents with the same percentage as last year expecting a

widening to at least 3%. The main change this year is that more people think the widening will be greater than 3%, with the percentage up from 28% last year. There could be a number of factors which would drive regulators to widen the band despite the current focus on currency stability. For a start, the renminbi still needs to meet all the criteria of being ‘freely usable’ when it enters the SDR in October and as band widening has tended to lead to renminbi depreciation, this could be one way for regulators to get the currency lower while avoiding accusations of manipulation.

No(11%)

Yes, +/-3% (55%)Yes, wider

than 3%(34%)

Rmb150bn-200bn (33%)

Rmb200bn-250bn (15%)

>Rmb250bn (7%)

RMB Poll Questions-r4.indd 26 31/5/16 6:20 pm


Offshore RMB Poll

BY HOW MUCH DO YOU THINK THE RENMINBI WILL DEPRECIATE AGAINST THE US DOLLAR THIS YEAR? (Total responses: 1,674)Most of the discussion this year has been about when rather than if the renminbi will depreciate. Last August’s surprise weakening of the currency against the US dollar caught markets o� guard but at the time was interpreted as a sign the Chinese economy was in trouble which increased the downward pressure. Add to that hedge funds and other investors shorting the currency and it was only by expending huge amounts of reserves that the Peo-ple’s Bank of China was able to stabilise

the renminbi. While volatility has settled down — and at the time of writing the renminbi was showing a mild year-to-date appreciation against the US dollar — what is clear from the answers to this question is there is still a high level of expectation that the renminbi will end the year lower. No doubt hedging strategies will continue to remain at the fore for some time but markets will have to wait to see whether depreciation will be gradual or through another one-o� move.

7-9%(4%)

<3% (29%)

3-5% (46%)

5-7% (19%)

>9%(2%)

HOW MANY PANDA BONDS WILL BE ISSUED THIS YEAR? (2015: Rmb8bn, Year to March 31: Rmb4.9bn) (Total responses: 1,557)Panda bonds had been dormant for years and then exploded into life in September a�er Chinese authorities decided the time was right to revive onshore renminbi debt sold by foreign issuers. The momentum that saw seven borrowers sell deals total-ling Rmb8bn in 2015 has continued into this year. Already in 2016 there have been �ve deals raising proceeds of Rmb4.9bn, according to data from Global RMB, and with a number of names in the marketing stage, 28% of respondents are likely to �nd their prediction is on the low side. Issuance would have probably already been greater this year if it was not for the uncertainties

holding back the market. As yet there are no formal guidelines, the ability of issuers to repatriate the proceeds is on a case-by-case basis and non-SSA issuers need to have �nancial statements that adhere with Chinese accounting rules. But none of that has stopped a long stream of issuers saying they want to sell a Panda. Sovereign and supranationals have been particularly keen and the pipeline includes Export-Import Bank of Korea, Hungary, New Development Bank Brics and Poland. And there is still plenty of work to be done to open up this funding channel as 30% of respondents do not know what is a Panda bond.

6-10 (24%)

What is a Panda bond?

(30%)

1-5(28%)

HOW MUCH WILL STOCK CONNECT NORTHBOUND DAILY TRADING PICK UP BY THIS YEAR? (Total responses: 1,510)Excitement and scepticism greeted the launch of the Shanghai-Hong Kong Stock Connect but with its second anniversary approaching in November the link has proved enduring and largely successful.

The net daily trading averaged Rmb78.18m in 2015, its �rst full year of operation, according to CEIC data. But this year that �gure has already more than tripled to Rmb243.75m. No doubt some of that can be attributed to the volatility in Chinese stock markets as investors moved to limit their exposure. The �gures for average daily turnover

certainly suggest that demand has cooled. Buy and sell orders totalled a daily average of Rmb6.21bn in 2015 but that had already fallen to Rmb3.33bn by the middle of April, a drop of 46%. This is likely to remain the case until markets provide some calm and stabil-ity. But the platform is a key piece of infrastructure as it remains the only way that o�shore investors can buy Chi-nese shares without a quota. And with a Shenzhen-Hong Kong link expected to launch later this year the programme is only going to get bigger.

Up 50-80% (4%)

Up 20-50% (33%)

Up 20% or less (62%)

11-15 (12%)

16-20(3%)

>20(3%)

Up 80% or more (1%)



Offshore RMB Poll

DO YOU PLAN TO USE THE CROSS-BORDER INTERBANK PAYMENT SYSTEM (CIPS) THIS YEAR? (Total responses: 1,661)It’s still early days for the Cross-border Interbank Payment System (CIPS) which went live in October but the platform is expected to play a key role in the interna-tionalisation of the renminbi. The system has been set up to meet the growing need for cross-border RMB payment and settlement. It also better links China’s payments infrastructure with other global systems as it has adopted the interna-tional standard messaging format. China made its ambitions for CIPS clear at the

time of launch when in the �rst 24 hours transactions took place with companies in Australia, Singapore and Luxembourg among others. For any treasurer who regularly conducts cross-border renminbi payments with China, CIPS should make the process more e¥cient and more standardised with existing payment sys-tems. With a third of respondents to the Asiamoney poll planning to use CIPS this year, demand is only set to grow for the payments platform.

What is CIPS? (16%)

No(48%)

Yes(36%)

WHICH REGIONS DO YOU EXPECT TO BE THE MOST ACTIVE ONES IN RMB BUSINESS IN 2015? LIST TOP 3. (Total responses: 1,662)It is perhaps unsurprising that East Asia is viewed as the most active region for RMB business despite the attempt to globalise the currency. Hong Kong remains the pre-eminent o�shore renmin-bi hub. It is the testing ground for new initiatives and of course there is the city’s close business and cultural links with China. It is also home to many interna-tional companies that are free to conduct RMB transactions through Hong Kong. South Korea has also boosted its renminbi credentials

in recent years. However other re-gions are viewed as taking a bigger slice of the pie this year. Southeast Asia is second pick with 43%, up from 31% a year earlier. Singa-pore remains the centre of Asean RMB activity and has stepped up its e�orts in the past year while Thailand and Malaysia became RMB hubs in 2015 underlying the importance of this region. EMEA has also seen its proportion rise from 2% to 9% while the Americas remain the laggards on similar levels to last year.

Asia – South East (43%)

EMEA(9%)

Asia – East (45%)

WHEN DO YOU THINK THE RMB WILL BE FULLY CONVERTIBLE? (Total responses: 1,662)Given the shutdown of outbound invest-ment schemes and the aggressive steps Chinese authorities have taken to stabilise the currency, it is surprising that those polled were not more pessimistic about full convertibility of the Chinese currency. In 2015, 10% thought it would take 0-2 years, 36% 3-5 years, 35% 5-8 years, 18% greater than eight years and 1% never. What is noticeable is that on the one hand the number of respondents in the

3-5 year bracket has increased the most while the percentage of outright bears has also risen. Full convertibility is of course di�erent from freely tradeable but this year’s curbs on outbound investment have de�nitely done little to increase converti-bility. However at the same time, o�shore institutions now have more access than ever to China’s onshore markets thanks to the opening up of the interbank bond market to long-only funds.

0-2 years (13%)

3-5 years (40%)

5-8 years (28%)

>8 years (15%)

Never(4%)

North America (2%)South America (1%)



Offshore RMB Poll

HOW MUCH NEW RQFII QUOTAS DO YOU THINK WILL BE APPROVED IN 2016? (2015: Rmb144.6bn) (Total responses: 1,517)Respondents were obviously bullish about China’s inbound investment programme last year with 63% predicting that new quota approvals would reach between Rmb-150bn and Rmb450bn. The �nal amount ended up being just short of this lower range with Rmb144.5bn approved, accord-ing to CEIC data. There is far more caution this year with nearly half of those asked forecasting that RQFII approvals will be lower than Rmb150bn. That said, another

46% have opted for more than Rmb150bn. Of course, while this questionnaire was taking place, the People’s Bank of China announced it was opening up the inter-bank bond market to almost all types of �nancial institutions. While many hold the view that this liberalisation makes RQFII largely obsolete, there may still be demand for RQFII products for investors that do not have the expertise and infrastructure to access China’s markets directly.

>Rmb450bn (4%)

Rmb150-450bn (46%)

<Rmb150bn (50%)

HOW MANY NEW RMB HUBS DO YOU EXPECT TO HAVE IN 2016? (Total responses: 1,634)The slowing pace of RMB hub designations last year was predicted by poll respondents with 67% forecasting that between one and �ve countries would get hub status. The �nal tally for 2015 ended up at the upper end of that band with �ve countries becom-ing hubs, down from eight in 2014. The year started o� busy with Malaysia, Swit-zerland and Thailand all gaining the status in January. Chile followed in May and then there was nothing until Zambia in October, which became the second African hub a�er South Africa. And if the majority are right

again this year then there is likely to be an-other slowdown in the number of countries that will become RMB centres with 52% voting for less than �ve though a sizeable 41% believe the number could be between �ve and 10. Despite the well documented turbulence in the currency, countries are still keen to make the most of the strategic and �nancial bene�ts that come with being an o�shore renminbi hub. For example in December, the Central Bank of United Arab Emirates signed a memorandum of under-standing on RMB clearing.

<5 (52%)

>10(7%)

5-10 (41%)

FX and Fixed Income Poll from June 6th to July 15th

www.globalcapital.com/asiamoneyfx�-poll

Brokers Poll from July 4th to August 12th

www.globalcapital.com/asiamoney-brokerspoll



China Securitization Forum 2016

GlobalCapital was one of the judges for the China Securitization Forum’s annual awards in April. Twenty transactions were given plaudits in credit and corporate asset securitization with six singled out as outstanding. We present the winners and photos from the event.

A real asset

TEN BEST DEALS IN CREDIT ASSET SECURITIZATION

English name Chinese name Kai Yuan 2015-3 Credit Asset-backed Securities 2015年开元棚改专项信贷资产支持证券

Jian Yuan 2015-2 RMBS 建元2015年第二期个人住房抵押贷款资产支持证券

Shanghai Housing Provident Fund 2015-1 Personal Mortgage-backed Securities 沪公积金2015年第一期个人住房贷款资产支持证券1号

Hejia 2015-1 Mortgage-backed Securities 和家2015年第一期个人住房抵押贷款资产支持证券

Hexin 2015-2 Personal Automobile Loan-backed Securitization 和信2015年第二期汽车分期资产支持证券

Rongteng 2015-1 Auto Loan-backed Securitization 融腾2015年第一期个人汽车抵押贷款资产支持证券

Suyuan 2015-1 Credit Asset-backed Securities 苏元2015年第一期信贷资产支持证券

Xingyin 2015-3 Credit Asset-backed Securities 兴银2015年第三期信贷资产证券化信托资产支持证券

Xingyin 2015-4 Credit Asset-backed Securities 兴银2015年第四期信贷资产证券化信托资产支持证券

Zhaojin 2015-1 Lease ABS 招金2015年第一期租赁资产支持证券

TEN BEST DEALS IN CORPORATE ASSET SECURITIZATION

English name Chinese name JD.com IOU Accounts Receivables-backed Securitization 京东白条应收账款债权资产支持专项计划

Hengtai Haorui-HNA Pudong Development Bank Tower Asset-backed Speci�c Programme 恒泰浩睿-海航浦发大厦资产支持专项计划

Rainbow Department Store (No.1) Asset-backed Securitization 招商创融-天虹商场（一期）资产支持专项计划

Xingqian No. 1 Huzhou Housing Accumulation Fund Loan Asset-Backed Securitization 兴乾系列住房公积金资产证券化项目

Sinolink Securities Huitong No.3 Asset-backed Securities “汇通三期”资产支持证券专项计划

Citic Huaxia 2015-1 Stock Collateral Loan Securitization 中信华夏股票质押债权一期资产支持专项计划

Yangzhou City A�ordable Housing Receivables-backed Securitization 扬州保障房信托受益权资产支持专项计划

Shimao Tiancheng Property Accounts Receivable-backed Securitization 世茂天成物业收入专项资产支持计划

Moses Factoring Asset-backed Securitization 摩山保理一期资产支持专项计划

HTF Capital–Shimao Purchasing–House Receivables-backed Securitization 汇添富资本-世茂购房尾款资产支持专项计划

SOURCE: CSF, GLOBALCAPITAL. NAMES IN BOLD SIGNIFY OUTSTANDING DEAL.

China Securitization Forum-r4.indd 30 31/5/16 6:23 pm


China Securitization Forum 2016

China Securitization Forum-r4.indd 31 31/5/16 6:24 pm


Asiamoney Roundtable: Issuer Panel

Asiamoney (AM): The starting point of this discussion has to be the economic environment, because clearly that is going to e�ect both pric-ing and appetite for ASEAN bonds. What is the economic outlook for Malaysia at this point?

Siti Zauyah, Malaysia: If you compare the world's GDP growth with Malaysia's over the last few years, we have achieved a commend-able growth rate. The economy grew by 6% in 2014 and 5% in 2015. This year, against a backdrop of estimated global GDP growth of 3.4%, we estimate that we will be achieving growth of between 4% and 4.5%, under the assumption that the price of crude oil will be between $30 and $35 a barrel.

For the coming years, we are quite con-�dent in achieving growth. We have well diversi�ed sources. Growth is likely to be fuelled by all major sectors except agricul-ture, because of the El Nino phenomenon. We have registered a trade surplus for 220

consecutive months. Our big trading partners are China, the European Union, the United States, and elsewhere. Despite the slowdown in China over the last few years, our exports to China have actually been growing; they still want to buy more from Malaysia. This demand from China, as well as from the EU, provides a bu�er against the decline in export prices.

We have private consumption and private investment as the key drivers of growth. But at the same time, we are expanding our service sector, putting emphasis on tourism, health tourism, and education. There are many infrastructure projects, including the MRT, LRT and Pan Borneo. There is plenty of reason for investors to be optimistic about Malaysia's future.

Masliza Sulaiman, CIMB: A good gauge of con�dence is to look at where CDS prices are trading. From a one-year high of around

240bp, �ve year sovereign CDS for Malaysia has now settled around 150bp. There has clearly been a tremendous boost in terms of perception and con�dence among interna-tional investors.

AM: How accurate is the perception among some international investors that there is, perhaps, an over-reliance on oil revenues �om the government?

Siti Zauyah, Malaysia: The government of Malaysia has realised the uncertainty of revenues from the commodity base. Since 2010, we have been diversifying away from a reliance on oil revenues; this is part of our long-term strategy. In 2009, oil-related sources made up around 40% of our reve-nues, but in 2015 we were able to reduce that to 21.5% of GDP growth. That is a remarkable achievement. We did this by focusing on key �scal consolidation measures, such as

Malaysia and Indonesia, two of the biggest economies in the ASEAN region, are being forced to adjust to a new global landscape. Demand from China is falling, US rates are creeping up, and commodity revenues are becoming increasingly unreliable. The transition towards sustainable growth in the future is essential for these countries, and essential for the continued development of their capital markets. Asiamoney sat down with a panel of leading experts from both countries to discuss how they can best navigate the path ahead.

ASEAN growth in an uncertain world

Panelists:

Tatsuya Higuchi, chief �nd manager, �xed income division, Mitsubishi UFJ Kokusai Asset Management Co., LtdBoo Hock Khoo, vice-president, operations, Credit Guarantee Investment FacilityChu Kok Wei, Group head, treasury & markets, CIMBArup Raha, chief economist, CIMB

Scenaider C.H. Siahaan, director of budget �nance strategy and portfolio, Ministry of Finance, IndonesiaNor Masliza Sulaiman, global head, capital markets, CIMBDato Siti Zauyah, deputy secretary general, Ministry of Finance, Malaysia

Moderator: Matthew Thomas, contributing editor, Asiamoney

Sponsored by

Asean Roundtable-r1.indd 32 31/5/16 6:28 pm



increasing tax compliance, looking at strin-gent auditing of tax, reviewing tax incentives – and, importantly, introducing the goods and services tax.

Subsidies have taken up a lot of govern-ment revenues. But we have now removed the sugar subsidy, we have rationalised the fuel subsidy, and we have increased the tobacco excise duty. We had to do that in a gradual phase. We cannot remove all of our subsidies in one go, so we are phasing them out. In 2014, there was a 50% hike in electricity tar-i�s and a 90% hike for the petrogas sector. In 2015, we introduced what we called the man-aged �oat pricing system, which removed the subsidy for oil. This has reduced our operating expenditure on subsidies by 32.6%.

It just happened that oil prices dropped signi�cantly last year. We do need to �nd means to reduce our �scal de�cit, because we are committed to the idea that our �scal position will be balanced by 2020. The global situation may have an a�ect on our strategy of achieving that, but we are still committed to the target. We have recalibrated our 2016 budget to make sure we can still meet our 3.1% �scal de�cit target.

AM: What is the outlook for the Indonesia economy? And in that context, how do you best calibrate the DMO's �nding plan?

Scenaider Siahaan, Indonesia: During 2015, we had growth of 4.8%, which is below our potential. In 2016, we will be achieving growth of around 5.3%. The contributors to this growth are largely the same as last year’s: household consumption, government expenditure, and investment. We are also hoping to see some increase in exports and imports, but this is not an anchor necessary for Indonesia to achieve its growth target.

Indonesia, rather like Malaysia, has been going through a major adjustment, moving from a commodity-based economy to a manufacturing-based. Indonesia will process raw materials, and export them with more value-added. That will help us weather the downturn in commodity prices. From �scal point of view, the emphasis now is on secur-ing purchasing power for Indonesian people and providing �scal incentives for businesses to encourage more investment to do the processing of materials.

In 2016, we're looking at a �scal de�cit of around 2.15% of GDP, so the total gross

issuance is around Rp540tr ($41bn). We will issue around 25% to 30% of such gross issu-ance in the global market, while the rest will be raised from the domestic rupiah market. Even though the volatility in global mar-kets is very challenging, we believe we will manage this funding plan without much of a problem. Retail investors will be an impor-tant source of demand. They are much less a�ected by global concerns. We have built up this investor base over the last few years, so we are now reaping the dividends.

All markets, especially emerging markets, are being forced to weather the global trends. But in some countries, such as Indonesia and Malaysia, too, we see that growth is very stable now. We are working towards 7% GDP growth in 2019; and the strategy to get there is to increase private sector participation, with the government concentrating on infra-structure, education, and health.

AM: How important is infrastructure devel-opment for making the most of Indonesia's economic growth – and how large should the government's role be in this area?

Siahaan, Indonesia: We believe that, at this point, the government needs to simplify the process. We need to reduce bottlenecks;

reduce some of the price hurdles for investors in, for instance, maritime projects; and help overcome some of other issues for private sector involvement. That can mean provid-ing tax allowances, or even tax holidays for businesses that meet some criteria. We believe that by doing this, the participation of private sector investors in the sector will be enhanced.

The government will take a stronger role in those infrastructure projects that are less �nancially reliable; private sector investors can take the lead role in projects that are more �nancially healthy. That is the grand idea for the development of Indonesia's infrastructure.

AM: One of the things that people talk about when it comes to infrastructure funding is the greater role of the bond market. But it seems that for years, it has remained little more than a talking point. It is still not a major – or even a minor – source of funding in some countries in the region. What role can bond markets play in infrastructure over the medium-to-long term?

Boo Hock Khoo, CGIF: It's interesting to speak about this in Malaysia, because Malaysia has a successful project bond market. We have

DATO SITI ZAUYAH, Ministry of Finance, Malaysia.

We have private consumption and private investment as the key drivers of growth. But at the same time, we are expanding our service sector, putting emphasis on tourism, health tourism, and education. There are many infrastructure projects, including the MRT, LRT and Pan Borneo. There is plenty of reason for investors to be optimistic about Malaysia's future.




had project bonds since 1993. Non-recourse bonds can go out to 20-plus years; the bond market is playing a critical role. It is o¤en not spoken about but when it comes to the size of the deals here and the long tenors available, the reality is that many other countries in ASEAN would love to have just a fraction of this capacity.

Around the region, what we see are mostly just government bonds and corporate bonds. Except Malaysia, the project bond market is o¤en completely absent. It is critical towards �nancing infrastructure, to my mind, because when you have long-term, �xed rate local cur-rency funding in place, the projects become less risky. They don't have to face re�nancing hurdles along the way.

Many of the projects in these countries are funded by bank loans, so a¤er �ve years or 10 years the debts have to be re�nanced. One of the consequences of limiting re�nancing risk is to amortise the debt repayment more rapidly. As the unit rate has to be bumped up because you have to make repayments as soon as you can, infrastructure meant to be used may end up being too expensive for the users. This is why in some countries, toll roads are more expensive per kilometre than they are in Malaysia. When you stretch the �nancing term out, you can bring the unit rate down and people can actually a�ord to use the infrastructure. Due to this, it is very important that we have project bonds support the development of infrastructure.

In many other countries in the region, we have a paucity of long-term savings. We have relatively large EPF contributions in Malaysia, which cannot be touched until contributors reach 55 years of age. There is no such capac-ity in many emerging economies. That means savings tend to end up intermediated through the banks, and besides equity, no-one is really investing in long-term instruments despite rolling over short-term deposits year in and year out.

I'm very excited about Indonesia's potential. One thing is very clear: Indonesia has tremen-dous �scal capacity to support infrastructure investments right now. The long-term savings are not su¦cient but if the Government can build up long-term savings, we will see quite a di�erent landscape going forward.

There are around 625m people in the ASEAN region. Many will move into cities. They will get more a§uent and will need better infrastructure to be in place. If there's

something certain in an uncertain world, you can be sure that the bulk of these people will need water, telecommunications, transporta-tion, and certainly power in the coming years. It is critical for us in Malaysia, as a relatively well-developed economy, to think about how we export our knowledge and our capabilities across the region.

AM: The question that naturally follows is how to export the long-term savings that exist in this country. What are the chances that Malay-sian investors will help to fund infrastructure development in other countries in the ASEAN region?

Khoo, CGIF: This is something we've talked to investors about a lot. Investors are tend to be fairly local currency-focused, perhaps with some exposure to G3 currencies. Rupiah, pesos, baht, dong: these currencies are quite thin in Malaysian portfolios. Investors should

start looking into this region, and looking at the alternative assets that will come out from these markets. They need to start by examining the correlations between these di�erent currencies and to �gure out the risk. I imagine the opportunities are there; the region is growing quite rapidly. Should we stay on our shores or venture out.

Japanese investors should give us inspira-tion. A lot of those investors are looking into this region because, despite global volatility, the prospects for the ASEAN region remain quite bright. With a di�erent perspective, this should lead to more intra-regional �ows in the future.

The raw ingredient to cook the dish is there. The question is: are we ensuring the right utensils are in place for the chef to cook the dish? The utensils will be the whole domestic �nancial infrastructure. How do we e¦ciently channel domestic savings to domestic investments? This should come before we even go to the stage of thinking about channeling regional savings into regional investments.

Chu Kok Wei, CIMB: This is an important, and passionate, topic for me. Before we even talk about cross-border �ows, we need to look at the macro picture. ASEAN domestic savings tend to be between 30% and 35% of GDP, depending on which country you look at. Use Indonesia as an example: that number will work out at around $250bn annually. No infrastructure �nancing, no matter how fast it happens, can consume that amount on any annual basis.

Bank loan �nancing will get more and more expensive. Banks are increasingly regulated by the Basel Committee and the G20. People ask what this will mean, and they o¤en point to a lack of long-term savings in this region. But I beg to di�er.

How many people are rolling over their one-year deposits every year for a decade? A very high proportion. If 10 years ago these investors were given a 10 year �xed deposit that gave them a reasonable return, they would have taken it. The raw material is in the system; all we are lacking is an e¦cient transmission mechanism. The more we look at the global regulation, the less likely it seems that the transmission mechanism will be bank balance sheets.

That is going to force the global capital markets to rise up, put the pieces of these

BOO HOCK KHOO, CGIF.

CHU KOK WEI, CIMB.




puzzles together, and make things work. We already have the raw materials in di�erent ASEAN countries.

Arup Raha, CIMB: I totally agree with Chu that domestic savings are critical if you really want to build infrastructure. It is now a matter of intermediating it e�ectively at the right price for investors. Infrastructure is going to play an increasingly important role. Look at the biggest Asian success story of the last two decades, which is clearly China. A lot of people think China's growth story was due to low wages, and that is partly true. But it was also due to backward and forward link-ages, and that comes from infrastructure.

If some countries in the ASEAN region are going to have to reinvent themselves as manufacturing bases now that the commodi-ties boom is over, the need for infrastructure becomes even more imperative. In other words: the need is certainly there, the domes-tic savings are there – it is now a matter of �nding the right way to intermediate this, which requires the development of medium-to-long term bond markets.

Scenaider Siahaan, Indonesia: The need for infrastructure in Indonesia is around $350bn for the next seven years. From the budget, we have a space for around $25bn to $30bn, so the rest will be the �nancing from state-owned enterprises and, for the most part, from the private sector. The challenge is to mobilise these funds. Most of the money from banks is short-term; that does not match the funding needs of infrastructure projects. Capi-tal market development is essential to help us ful�ll our goals.

Sulaiman, CIMB: We are lucky in Malaysia that we have funds that are ready to commit to long-term infrastructure �nancing. Bonds made up around 32% of infrastructure �nancing in this market in 2015. The ability of investors to participate heavily in long-term infrastructure bonds was largely driven by the award of concessions with predictable cash�ow for infrastructure projects. The sanc-tity of the concession contracts allows rating agencies to develop strong methodologies and assign credible ratings which in turn helps investors price these bonds accordingly.

It is not just pension funds and life insur-ance companies that participate in Malaysia's infrastructure bond market. Fund managers

and corporate treasurers are also buyers of long-term project �nance bonds facilitated by the liquidity provided in the secondary markets. Secondary market liquidity is another important component for a strong infrastructure bond market; it is not all just about concessions with predictable cash�ow and the sanctity of the concession contracts.

To your question of whether Malaysian investors can participate in the infrastruc-ture bonds of other countries in the region, I think the outlook is quite promising. We saw participation in the joint venture of PTT and Petronas a few years back. That was a long-term �nancing, and the goal was to raise US dollars. In the ringgit market we were able to facilitate a synthetic US dollar deal. In cases where there are sponsors in which local investors here are comfortable with, funding could potentially be raised in ringgit and swapped back into another ASEAN currency of their choice. By developing this possibility, many more projects can become economically viable for sponsors.

AM: We're in a situation now where the Chinese economy is losing steam and US dollar rates are moving up. Both of these factors, on their own, could have a big a�ect on many economies in the ASEAN region. How impor-

tant are these two factors together for the outlook of the ASEAN region as a whole, and for particular economies within the region?

Raha, CIMB: Very important. We are an externally-driven region; the main source of growth has been exports and we rely at least in part on foreign �nancing. But that does not mean these changes are necessarily a bad thing.

We have enjoyed a tremendous boom from China, which has clearly been of bene�t to commodity producers like Indonesia and Malaysia. Obviously, China is slowing from here. It's a policy-designed slowdown, which is also including a rebalancing from investment to consumption. That has an implication for ASEAN economies, because the investment part is the more import-inten-sive part.

The rise of China has changed the face of manufacturing in Asia. The �rst step was undercutting other Asian economies, making China into the major manufacturing hub of the world. But now as China is moving up the value chain, it is ceding that role to the ASEAN region, especially to countries such as Vietnam. There is a restructuring taking place in this region because of the nature of this transition.

SCENAIDER C.H. SIAHAAN, Ministry of Finance, Indonesia.

All markets, especially emerging markets, are being forced to weather the global trends. But in some countries, such as Indonesia and Malaysia, too, we see that growth is very stable now. We are working towards 7% GDP growth in 2019; and the strategy to get there is to increase private sector participation, with the government concentrating on infrastructure, education, and health.




People talk about a hard or so¤ landing from China, and try to predict how tough things are going to be. But my view is that we have actually been experiencing the landing for the last �ve years; it is no longer something to be anticipated. If you look at the e�ect it has had in terms of investment, industrial production, exports, commodi-ties, that is evident. But Malaysia has been resilient. So has Indonesia. We have been experiencing the landing, and although it has probably put us on a slower growth tra-jectory, it has also ensured we have become more resilient.

That is the Chinese part of the story. The US part of the story is that, although we obviously prefer lower US interest rates, we also want higher US growth. The two do not go hand in hand. If we're seeing a sustained rise in interest rates from the US that means that growth is going to come back – and at this point, we are still talking about very low interest rates. No-one is talking about interest rates going up to 3% or 3.5%.

The easiest way to think about US interest rates is to think about the idea of normal interest rates, or where rates should really be. If current rates were well below what normal interest rates should be, we would have seen rampant in�ation over the last �ve years. But we haven't seen that.

We're in a very good scenario in the US right now where jobs have been added but labour force participation is also rising, so we're not getting pressure on wages. We may be hitting a sweet spot in the US economy where growth picks up. It is a potentially a win-win situation for the next six to nine months, so as long as we can get our external trade going. I'm optimistic. It seems I am one of the few people who is optimistic at the moment.

AM: Higuchi-san, how important are the local economic and credit stories to you when you look at the ASEAN region – and how impor-tant are these global factors?

Tatsuya Higuchi, Kokusai Asset Manage-ment: We felt the �rst hike of US interest rate in December was just normalization; we do not think they can hike too much because of their low CPI numbers. In Japan, BOJ have introduced a negative cash rate. In Europe, central banks have done the same. As the result, many government bonds in developed

countries are already trading with negative yield. It seems that US interest rates are unlikely to go up so much in this environ-ment.

ASEAN bonds o�er good value. Most coun-tries in this region o�er bonds with a higher yield compared to Japanese government bonds and European bonds, even compared to the US treasuries. As long as the curren-cies start to stabilize – and we have seen this recently –ASEAN countries should have more investment in�ows from developed countries.

Regarding China, the growth rate is still OK. China became already the second largest country in the world, and the other large countries tend to have a very low growth rate. As the result of that, China could not print strong growth rate as before. But China is still going to print positive numbers even if we might see some slow down compared with previous years. There are some imbal-

ances in Chinese �nancial markets that might force a devaluation of the renminbi. In this case, because of the high trade amount between ASEAN and China, ASEAN curren-cies might see some devaluation to adjust the value of currency. But it will not be a major change.

AM: What is the most attractive ASEAN debt market for you at the moment?

Higuchi, Kokusai Asset Management: We prefer the Indonesian government bond market. Malaysian government bond market is also very attractive, compared to other countries in this region, and we are happy to see the stabilisation of rupiah and ringgit over the last few months. These are the two markets that stand out for us at the moment.

AM: How much are the changing environ-ments in China and the US a�ecting the willingness of foreign investors – whether from those regions, from Europe, or even from Latin American – to come in to the ASEAN region's debt markets?

Khoo, CGIF: We o¤en generalise about inves-tors. In reality, there are di�erent sets of investors. There are those that want to build factories, those who manage hot money; those who are long-term, those who are short-term. This region will grow faster than the global average for sure as the 625 million people in the ASEAN region move forward in the next few years.

Siti Zauyah, Malaysia: The fact that the US is trying to increase interest rates is not a major concern for us. Overall, foreign investors hold around MR180bn ($46.4bn) of Malay-sian government debt. In the middle of last year, there was a lot of uncertainty around the US interest rate. We did see some fund out�ows at that point, but it was actually quite minimal, around MR3bn – and once the US made the announcement, the funds came back. It only took about two months to return to the level we're seeing now.

We're not concerned that announcements from the US are going to lead to foreign investors pulling their money because the majority of non-resident holdings are long term investors, comprising asset man-agement (44%), central banks (29%) and pension funds (15%).

ARUP RAHA, CIMB.

TATSUYA HIGUCHI, Kokusai Asset Management.




Siahaan, Indonesia: The same thing hap-pened in Indonesia. Before the Fed's interest rate announcement in December, investors were worried about how far rates would go up, and how quickly. But now the Fed has given investors con�dence that interest rates will go up slowly; that has ensured much more stability in fund �ows. We want interest rate normalisation to happen in the US, because it means normalisation is happening in the economy, too.

Raha, CIMB: It really depends on the par-ticular circumstances of an economy when interest rates go up. If you look back to the second half of 2013, when we had the taper tantrum, Indonesia was pretty badly hit. But a¤er the Fed raised rates in December, Taiwan cut rates the very next day, and Indonesia has cut three times since then. Anybody who is nervous would not do that.

The circumstances are di�erent now. We have found a certain degree of stability. The current account has improved tremendously in Indonesia, and in�ation has come down. Malaysia has attracted more long-term invest-ment, which gives stability. These economies are much more stable. It is not simply a ques-tion of what is happening to rates in the US, it is also a question of how strong our domestic economies are, too.

Kok Wei, CIMB: There is too much attention paid to rising rates in the US. We need to understand only two terms in this environ-ment: 'new normal' and 'tantrum'. I have a young son, so I know what a tantrum means. If you have given sweets to your son, is it possible to take them back? No. That's what global central banks have done. It is impos-sible for a normalisation to take back all the money that has �owed into the market through quantitative easing. Therefore, inves-tors need to adjust to a new normal.

US rates at probably 0.50% or 1% will be considered normal; negative interest rates will be called expansionary monetary policy. That is the new world that we are living in. I can't help but wonder if the the ASEAN region is at a turning point right now with our high interest rates. If investors miss this opportu-nity, they might miss it for life.

Main Street is the US now; Wall Street is no longer the US. Silicon Valley may be great, but it does not hire the bulk of labour, and innovations in Silicon Valley are improv-

ing productivity so fast that labour has no bargaining power to ask for higher wages. We are in a structural low in�ation environment right now. Low rates are the new normal and they are going to be exported globally.

AM: We have talked a lot about changes in the US and China, and how they are going to a�ect the ASEAN region. But there are also pretty seismic changes going on in this region too, in particular the development of the ASEAN Economic Community. I'd like to tackle this question in two parts. First, what should people expect from ASEAN �nancial integration?

Siti Zauyah, Malaysia: The ASEAN Economic Community has come up with a blueprint for 2025; giving themselves ten years to work towards �nancial integration. That is a good start, and re�ects the commitment of countries in this region to pushing forward in this area. They're working to encourage ASEAN members to liberalise their �nancial sectors, so we can ensure more market access and better penetration in regional insurance markets and capital markets.

But one thing we take note of is that not all ASEAN countries are at the same level of development. That is why the AEC is putting emphasis on �nancial inclusion and �nancial stability.

Financial inclusion is largely about educat-ing people and improving �nancial literacy, as well as o�ering a wide variety of products and services. We're looking at establishing banking agents in remote areas. In Malaysia, this is partly happening through Bank Sim-panan Nasional (BSN), a government-owned

bank that is tasked with meeting the �nancial inclusion objectives of the government.

The other factor is �nancial stability. How can the AEC improve on supervision and enhance surveillance? That comes down a lot to the regulatory framework, to governance and to transparency. Greater transparency can give a lot of con�dence to market players.

Siahaan, Indonesia: I'd just like to make one point on this subject: there can be no integra-tion without a belief in diversity. This is what the ASEAN region has to go through, espe-cially at the level of political leaders. Without a belief in diversity, there can be no synergy. We need to trust each other, build up com-munication, and respect the di�erences that exist among di�erent countries. As long as this can be achieved, we can mobilise labour, trade and capital and develop together.

We need further standardisation of labour and of rules. But it is also about changing the mindset. We need to stop thinking about us as being competing countries within one region, and start thinking about us as one. If we do that, we can develop in a better and more fruitful way than what we have seen in Europe.

AM: Aside from �nancial integration, there are the broader questions about increasing trade �ows, opening up new markets, and seeing the bene�t of widespread openness in the markets for goods and services. How optimistic should investors be about the wider AEC project?

Raha, CIMB: In theory, it's a good idea. In practice, it may be another story. The devil here is going to lie in the details. If you take the easy part, which is tari�s, there are actu-ally very few tari�s between ASEAN countries. That means on the trade side you're down to non-tari� barriers, which have a lot of vested interests and are not easy to overcome.

Even if you focus only on the �nancial sector when you're talking about integration, it is not easy. There are di�erent banking sys-tems, di�erent regulations, and so on. When you look at employment governments want to protect their labour forces.

In theory, one production base, a large common market and huge economies of scale mean ASEAN integration is a very good idea. But in practice, it is going to be di¦cult to achieve, and is likely to take a lot of time. ◼

MASLIZA SULAIMAN, CIMB.



Asiamoney Roundtable: Investor Panel

Asiamoney (AM): In the last panel, we focused quite a lot on the macroeconomic picture, considering the impact of the slow-down in China, rising rates in the US and the impact of greater ASEAN integration. This discussion will focus much more on the facts on the ground when it comes to bond issu-ance and investors. But the starting point for a lot of investors is going to be �guring out where rates are going, and �guring out where currencies are going. What should they expect?

Arup Raha, CIMB: Let me start with a story. Around September last year, we took an informal survey — we asked people: if you could choose what currency your salary would be paid in next year, what would it be? I have to tell you that very few people chose the ringgit at that stage. It is now the world's best performing currency, so predictions on these things should always be taken with a pinch of salt.

We certainly expected the ringgit to be weaker than it is now. We felt there were four big external factors that would drive the ringgit lower. The �rst is interest rate expectations in the US. We started the year with the Federal Reserve expecting 100bp of increase, and the markets expecting 50bp. We're now at a point where the Fed expects to raise by 50bp, and the market expects it to rise by 25bp, or perhaps not to raise rates at all. As far as expectations are concerned, there has been a loosening of Fed’s policy stance.

This feeds into the second factor: expectations of US dollar strengthening. The two things are obviously connected, and what people have perhaps got a little bit wrong is that expectation that although the bull run in the dollar is largely over, there is still going to be some strengthening. I still expect that, over the medium term, because of the policy divergence between the US and

Europe, Japan and, to a certain extent, China.

The third factor was the weakness of the renminbi. We still think the renminbi will get weaker, largely because of what China is trying to achieve. They know that over the medium term, the Chinese economy is likely to slow, but they want to make sure it lands OK. The only way it lands OK is if there is continued stimulus; that is going to show in the value of the renminbi.

The fourth factor, and the real surprise for us, was the rally in commodity prices. We still expect commodity prices to be so¤en, although the major source of commodity price weakness is over. We are seeing signs of activity in the Chinese , we are seeing Chinese PMIs improve, housing numbers are getting better, but we think this is temporary.

If you take the four factors together, the outlook has not changed dramatically. That means we still expect US interest

Developing the debt marketDomestic bond markets in the ASEAN region are still at vastly di erent stages of development, and oen di er dramatically in terms of depth, sector diversity, and the rating demands of investors. That makes the job of increasing cross-border �ows between these markets all the harder. But the opportunities are rife, and growing. Asiamoney sat down with a group of debt market experts to discuss how these markets can grow individually, and how they should grow together.

Panelists:

Chong Kin Leong, executive vice president, �nance, GentingChung Chee Leong, president/chief executive o�cer, Cagamas Khoo Boo Hock, vice-president, operations, Credit Guarantee Investment FacilityChu Kok Wei, group head, treasury & markets, CIMB

Arup Raha, chief economist, CIMBNor Masliza Sulaiman, global head, capital markets, CIMBEsther Teo, head of �xed income, A�n Hwang Asset Management Moderator: Matthew Thomas, contributing editor, Asiamoney

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www.cgif-abmi.org

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rates to go, the dollar to rally, the renminbi to be weaker, and commodity prices to be so¤. That means that, from here, most likely, there is more downside to the ringgit than upside. We think a similar situation will play out for the Indonesian rupiah. I'd ask investors not to get too caught up in the numbers, but to think of the factors driving commodity values.

AM: There are two factors to consider for people in this room: the �rst is making predictions about where rates and curren-cies are going to go. But the second part, arguably more important, is making sure they hedge these risks e�ectively when they have made the analysis. How �exible are the hedging options available to investors and issuers in the bigger ASEAN markets?

Chu Kok Wei, CIMB: The big risk is that we analyse so much that we don't act. Volatility is a given. The short-term noise can be so loud that it crowds out the long-term view. We are going through a process of forcing our traders to write down the base case outlook and stick that on their screens. Vola-tility will be very loud around the base case, but that number always needs to be kept in mind. That is very important, otherwise traders are always second-guessing their actions, and saying, 'I should have done this, I should have done that.'

That, to me, is a very important framework to promote. Have a sense of where you expect markets to go before the volatility happens, don't make those estimates when the volatility is occurring. Because during the volatility, the whipsaws will be so violent that most of us can't think very straight at that time. You really need a bearing at that time.

In terms of the actual hedging products, there is enough available. Fundamentally, risks don't get far from currency exposure, interest rate exposure and, for some issuers, commodity price risks. In each case, most of the hedging �exibility is there for these markets. We are not lacking any innovative instrument that would change the situation for issuers; we are lacking a bit of action.

AM: If the spread of products necessary for companies to hedge is largely there – at

least in this market – is the liquidity su�-cient in those products to ensure they can hedge without problems?

Kok Wei, CIMB: Liquidity di�ers from market to market, but in many countries the situation is good. In Malaysia, across most asset classes, there is su¦cient liquidity. In Singapore, the liquidity is �ne. In Indonesia, FX hedging solutions are probably more liquid than rate or commodity solutions. There is su¦cient liquidity in these markets; the important thing is market participants developing a very active framework to understand and work around market volatility.

Issuers complain at times that they are not getting a tight bid-o�er spread in periods of illiquidity and volatility, but they need to understand that in such a market, the cost of not hedging can be

much greater. Liquidity could improve, of course, but it is largely there. The key is for issuers to use the options available to them.

Esther Teo, A�n Hwang: The derivatives market in Malaysia is relatively OK compared to some other ASEAN countries. When you look at more sophisticated markets like Singapore, it becomes obvious that there is an inverse relation-ship between regulatory restrictions and market sophistication. The more regula-tors become relaxed about the rules, the more the market can grow and become more sophisticated in terms of the instru-ments available, or the market players that are able to participate. In Singapore, it is not just institutional money; private banks play a big role in developing the market as well. That helps create a more robust hedging environment.

In the ASEAN as a whole, we are still in our infancy in terms of derivatives and hedging solutions. A lot of us in this room are real-money, institutional investors. But how many of us look at hedging our interest rate risk? We are still in a very early stage of going in that direction, because there have been a lot of challenges for investors. Some policies, particularly at pension funds, need to be updated to get with the times. They o¤en do not allow investment managers to hedge rate risk. This is starting to change, but it is a slow process.

In terms of the product availability: for interest rates we have the interest rate swap market, which is fairly liquid; for the FX market we have FX forwards, which are fairly liquid as well. In A¦n Hwang we have started the process of hedging some of these risks in our portfolios since 2012, although at the moment a lot of our rate risk has not been hedged because we think rates are going lower. We have put some hedges in place to �gure out the options, and make sure we can do it in future. FX hedging is perhaps more important for us, since FX volatility can eat away returns.

It is not just a question for investors, though. It is also very important for issuers to look at hedging the risks that arise when they issue bonds. We saw last year when the rupiah depreciated greatly, a lot of Indonesian issuers faced the risk

ARUP RAHA, CIMB.

CHU KOK WEI, CIMB.




of credit rating downgrades because they had issued dollar bonds without hedges. A¤er that experience, a lot of issuers have learned to be proactive.

Chung, Cagamas: Cagamas practices a strict match-funding policy, meaning to say that all the loans we purchased are funded by bonds of matching size, duration and self-su¦cient in cash �ows. This has been the case since day one of Cagamas' oper-ation. In the case where Cagamas issues foreign currency bonds, all the foreign cur-rency exposure must be fully hedged and quali�ed for hedge accounting. The market options are actually available for issuers and investors at this point when it comes to hedging, it is just a question of pricing.

In terms of tenors, price discovery beyond 10 years is normally not e¦cient for hedging. We �nd that we can easily hedge the foreign currency and interest rate risk for tenors of around seven years, at the most. But a liquidity premium kicks in between seven years and 10 years and beyond 10 years hedging no longer seems e¦cient. This is something that should be of concern to issuers, because it limits our options.

Masliza Sulaiman, CIMB: We have wit-nessed a lot of adventurous corporates venturing abroad, arising from the fact that these Malaysian corporates are growing and hence getting more overseas exposure. We see a lot of rupiah exposure, a lot of dollar exposure, and a lot more diversity in terms of funding currencies. In the last few years, we have been placing emphasis on helping these corporates fund their operations abroad via a direct foreign currency funding or via a synthetic deal where they are funded in the most optimal currency via cross currency swaps and therefore eliminates their currency risk.

We are equipped in terms of looking at di�erent ASEAN currency markets, as well as the G3 markets, so we are happy to run the analysis for our clients on the most optimal market to tap. This also takes into account the target size and tenure of an issuance and other objectives the issuers may have.

There are a lot of investors in Malaysia who have ventured abroad, o¤en into

the Indonesian rupiah market. This is commendable, and is the sort of development we need to see in this region. Some of these investors have accepted the currency risk, but we have also seen investors hedging their currency risk. We need both types of investors to develop cross-border �ows.

AM: In the very �rst event we did in this series four years ago, there was quite a long debate about capital �ight and the risk of hot money �om foreign investors. Given the changes we have seen in the global markets over the last year or so, in particular rates going up in the US, how much should that still be a concern to governments and other market participants?

Boo Hock Khoo, CGIF: Things are very di�erent now than they were at the time

of the Asian �nancial crisis, but the noise around the markets sometimes does not make this distinction. People have long memories, but things have changed tremendously. Governments can certainly continue with the reform process but the baseline, as Chu says, needs to be con�-dence. You're going to have capital �ight if there is no con�dence, but if the base line talks about the competitive nature of the economy, the reduced reliance on oil, and the consumption story here in Malaysia, con�dence will follow. The country is very di�erent than it was in the run-up to the �nancial crisis.

Things have changed in other ways, as well. We used to have a negative view on printing money and on capital controls. But now quantitative easing is cheered and Haruhiko Kuroda [the governor of the Bank of Japan] is recommending to the Chinese that they tighten capital controls. Now we have negative interest rates: try explaining that to your parents. This is the new normal and it is a very di�erent situation to what we have experienced in the past. These unusual policy levers did not exist a few decades ago, but they are now an option to policymakers across the region.

All of these tools should also be on the table for Asian governments, but con�dence is the biggest factor. Governments need to ensure they have con�dence from both domestic and international investors, and they can do that through reforms. The Philippines has done a great job in this regard. Vietnam is building con�dence rapidly. Many ASEAN countries are on this trajectory.

AM: The rise of quantitative easing has certainly represented a major addition to the policy options now at the disposal of govern-ments across the globe. But the limits of this policy has also been displayed. Japan seems a prime example: massive quantitative easing and a programme of negative interest rates have had little impact on corporate con�dence, investor con�dence or even on the currency.

Khoo, CGIF: That's a valid point. We're entering this uncharted territory. It raises the question: how negative will negative

ESTHER TEO, A�n Hwang.

MASLIZA SULAIMAN, CIMB.




interest rates be? At some point, people will start taking cash out of the bank and keeping it physically. We live in very di�erent, and very di¦cult, times today. It is becoming increasingly hard to look in the crystal ball and see where things are heading.

Arup Raha, CIMB: Monetary policy is not the only tool, and monetary policy may have reached its limits. The only similar experience we have had was the Great Depression. That led to the New Deal from FDR, but the world still did not recover fully; it took World War II to spark a recov-ery. Everyone spent money to fund the war, so there was co-ordinated – albeit not planned – �scal stimulus worldwide.

A large part of the economics community has been saying for a long time that �scal policy needs to play a larger role. There have been policy mistakes. The US put into place a $800bn stimulus package, but the chief economic adviser at the time had asked for $1.4tr. Europe mistakenly went for austerity in 2011. Japan has raised the consumption tax, thinking that they were out of the bad times. Because of these policy mistakes, it is incorrect to put the entire onus on QE.

QE did what it was supposed to do, which was to keep the banking sector liquid and avoid a complete crash. Fiscal policy hasn't stepped up.

AM: How attractive are the Malaysian and Indonesian debt markets right now? How easy it is for investors to �nd deals that meet their yield requirements?

Teo, A�n Hwang: At the start of the year, we were very bullish on the Indonesian and Malaysian debt markets. The funda-mentals of these countries are still strong.

Indonesia is moving in the right direction in terms of policies and infrastructure spending. In�ation is coming down. We expected the central bank to cut rates by 100bp this year, so far they have delivered 75bp. That was our biggest call for the year: to overweight Indonesian rupiah government bonds.

At this point our strategy with Indonesian government bonds is to buy on dips. We think the central bank will

adopt a wait-and-see mode when it comes to further rate cuts, which makes it likely that the market will trade sideways for a while.

We do not hedge our rupiah exposure because the rupiah and the ringgit tend to move together, and the hedging costs are quite high. But that has paid o� for us this year, since the rupiah has performed quite well.

Our strategy is fairly neutral at this point, but over the next few months there is a chance that Bank Indonesia could deliver more rate cuts, so we expect bond yields to go lower.

In the ringgit market, a¤er the sell-o� in the country last year, and the fall in commodity prices, the worst appears to be behind us. The ringgit has found some stability now, and for that reason we are more comfortable than we were last year.

It is worth mentioning that there are a lot of foreign investors in the ringgit bond market. They make up about 31% of the total government bond investor base, and even when the ringgit corrected by around 20% last year, we did not see huge out�ows from these investors. The Asian Development Bank estimates that about 30% of these investors are central banks or sovereign wealth funds, which have a long holding period, and another 18% are pension funds in the ASEAN region. Japanese investors are also involved; these are long-term investors.

We think Bank Negara could cut interest rates in the second half of the year, so we are going long duration at the moment.

Given what is going on in the world, the ASEAN region is a good defensive play at the moment, and in this space, we think Malaysia and Indonesia are the best picks at the moment.

AM: How easy is it for issuers to hit their �nding targets in this environment?

Chong Kin Leong, Genting: We have not seen interest rates this low for such a long period of time before. We are constantly marketed to by banks who want us to turn to the bond market, but Genting holds a lot of cash, so we o¤en have the ability to fund projects using internal cash�ow as a starting basis.

But if we �nd there is a need to do funding, we typically approach the debt market. We look at matching the currency and tenor of our funding with our projects at the outset. Our projects are typically integrated resorts, power plants or plantations, and they require long-term funding because they do not reach maturity in the �rst �ve years. It takes about three years to develop and contruct an integrated resort. We usually raise money for tenors of �ve years, 10 years, or beyond. But many investors have a preference for shorter-term money at the moment.

That means we have a more limited investor base. That is compounded by the fact that our integrated resorts business is not shariah-compliant, so we cannot sell our bonds to Islamic investors.

Last year, we had issuances by our subsidiaries, Genting Plantations Berhad and Genting Malaysia Berhad. The plantation group was rated two notches below Genting Malaysia Berhad, but it managed to get a better yield. This was partly because of a timing di�erence, but it was also because of a more limited investor base for Genting Malaysia's paper. This is one of the issues we have experienced when turning to the markets.

Genting Malaysia has a $5bn MTN programme, from which MR2.4bn ($595m) has been tapped so far. There is still some ammunition le¤ if need be, but the business is generating good cash �ow. That is the always the �rst option for us, even if interest rates are low.

CHONG KIN LEONG, Genting.




In the foreign markets, we have sold US dollar bonds and Singapore dollar bonds. That depends on the need of our projects. In many cases, where a green�eld project – for example, a power plant – is not able to get good ratings, there is still a good project �nancing market in the banking sector. Banks are willing to provide us loans out to 15 years. To be frank, not a lot of banks can allocate capital to these deals nowadays, because of Basel III, but we still �nd we can get better funding from banks for green�eld projects.

There is a lot more liquidity in dollars, meaning we sometimes need to turn to FX swaps to hedge our foreign currency risk. We would like to see more �nancing options in ASEAN domestic markets, which would relieve us from having to turn to the dollar market. But generally speaking, the capital markets are there, they are quite liquid, and we have had no great problem �nding the funding that we want.

AM: The intentions of Cagamas are a good litmus test for how Malaysian borrowers view the debt markets, given the regular �nding of the company and its willingness to tap overseas markets. How does Cagamas make the decision between whether to tap the domestic or foreign debt markets?

Chung, Cagamas: In the ringgit market, Cagamas is the largest issuer of private debt securities since 1987. We have issued a total of MR292bn worth of bonds and sukuk. The support from investors in this room and, also outside of this room has been tremendous. But some investors are starting to approach their limits. This is partly because of Basel rules, and the Single Counterparty Exposure Limit (SCEL) imposed by Bank Negara Malaysia for �nancial institutions, and and partly due to internal limits. There are still a lot of investors out there that can buy Cagamas paper, but this is something for us to con-sider. It is one reason why we are so active in exploring new markets.

The establishment of multi-currency EMTN programme provides us the opportunity to tap any market we �nd the most e¦cient in terms of pricing, as well as liquidity. When a bank comes to us and wants to sell us a portfolio of loans, we will

need to evaluate the advantage of issuing in ringgit compared to foreign currencies as well as the foreign currencies available.

The driving factor when we weigh up these di�erent funding currencies is volatility. We look at the benchmark yield curve, the spread, and the cross-currency swap. Then we look at liquidity, the depth of the market. Finally, of course, there is a question of timing. Because Cagamas operates a match-funding model, timing is essential. If a bank wants to sell us a portfolio of mortgages today, we have to raise our funding today; we will not delay the funding aspect in the hope that a market gets more attractive.

Recently, we did a lot of Singapore dollar bonds. When we converted them to ringgit, it made economic sense, at least in the tenors we chose. We also issued Singapore dollar sukuk, making us the only foreign issuers in that market in the last two years. The investors are there in that market, but the pricing can be more expensive because of the limited hedging mechanisms in the Islamic �nance market. We do synthetic funding in some cases to reap the best bene�ts. That allows us to get the most optimal funding available.

AM: Let's take a look forward and consider what needs to develop in the ASEAN debt markets in the �ture. What changes need to occur in this market to make your jobs easier?

Teo, A�n Hwang: The ASEAN markets have come a long way. The bigger econo-

mies like Singapore, Malaysia, Indonesia, Thailand and the Philippines have relative well-developed banking systems, relatively well-developed government bond yield curves, and mature and reasonably deep markets that are able to provide the liquidity and pricing trans-parency needed to build corporate bond markets. But outside of Malaysia and Singapore, the corporate bond markets in these countries are still at a low stage of development.

In Malaysia the corporate bond market is worth around 31% of GDP, and in Singapore it is over 20%. But in Indonesia it only 2% of GDP, in the Philippines it is about 6%, and in Thailand it is in the teens. These countries are still stuck on a banking-centric model. We need to work further on a regional approach to improve these markets. We need to see deep and liquid corporate bond markets across the region.

Even in Malaysia, there is room to grow. The market is relatively well-developed, but only the big, well-known borrowers o�er liquidity to investors. There is not a very diversi�ed investor base here; it is largely dominated by big institutional investors who tend to take the same sort of view.

Access to information within the ASEAN region could also improve. We're interested in buying Indonesian rupiah corporate bonds, but where can where we get information about these bonds and how they have traded in the past? In Europe or the US, that would be easy. But in a lot of countries in this region, the information is not readily available.

Sulaiman, CIMB: Increasing the diversi�-cation of investors is de�nitely going to be an important step and is something we have been working on. We have tried to bring di�erent local currency investors across the borders. For example, we have helped Malaysian and Thai investors invest in the Indonesian rupiah bond markets. It is a bit harder in the ringgit market, because the spreads are lower but also because there is not a great deal of diversity among the issuer base. That means single borrower limits get hit quite quickly.

BOO HOCK KHOO, CGIF.




Chong, Genting: I share Esther's view that while markets are liquid and strong in Malaysia and Singapore, there could be a lot more development that can be done elsewhere. It is partly a re�ection of the access foreign investors have in these mar-kets. Foreign investors hold around 30% of government bonds in Malaysia; they see Singapore as safe-haven. But when we look at a market like Indonesia, trying to borrow rupiah in the domestic market can some-times be quite challenging. It is o¤en much easier – and cheaper – to borrow in dollars and swap the proceeds to rupiah.

There has been a tendency in Indonesia for local corporations to enter and settle their contracts in US dollars. That means there is a parallel funding source in the market there. The government is trying to move these deals towards more rupiah-denominated contracts. That will take some time. But in order for it to be fully achieved – and to help companies like us fund – we need more developed local bond markets.

Chung, Cagamas: In 2012, we looked at our mandate and considered how we can complement Malaysian banks that are operating within the region. We explored how we can replicate the model we have in this country and apply it to other countries where Malaysian banks are operating. We got some interest and had exploratory meetings with regulators from Thailand and Indonesia. They were supportive of the idea of a Malaysian entity issuing in these markets. But there were other impediments in place meaning that we could not, until today, do these deals yet.

One of the restrictions that got in our way was a restriction on foreign ownership of properties. There was also a restriction on non-residents lending to residents. Investors in Thailand and Indonesia were keen to buy Cagamas paper, but they couldn't because we were unable to issue in these currencies at the moment. These are factors that should be considered if we intend to allow for more cross-border issues.

Going back to the point Liza was making earlier about bringing foreign investors into this market, there seems to me to be more interest now. We have seen interest

from investors in the UK and many other countries in Asia. These investors previously concentrated on the government bond market, but they are now increasingly looking towards corporate papers, particularly the stronger rated credits.

Khoo, CGIF: Increasing cross-border �ows is a work in progress, and there are many issues. Withholding tax on interest in many countries is a problem. It doesn't apply in Malaysia, because we don't have withhold-ing tax on bond coupons. But it is certainly something we want governments in the ASEAN region to think about when it comes to attracting foreign investors.

In terms of the Malaysian market, I can tell you what I would like to see. I remember the �rst slide I put together on risk aversion in the ringgit bond market was in 2003. We were losing one rating notch every 18 months or so; we had a BBB market at one time, but then investors started to focus on single-A names. Today, 90% of issuers in this market are AA or above.

If you look in Thailand, it's the reverse: only 10% of issuers are AA and above. The market here is, of course, larger in volume. But the variety of issuers does not compare well. We should look seriously now at this point. We cannot celebrate a market that consists almost entirely of AA and above credits. We need to press the red button now and look at what we can do to address this. The development to allow unrated bonds to be traded is positive as most developed markets allow for this. But

unrated bonds are not alternatives to the lower rated papers. How can an unrated bond be better than a single A or BBB rated bond?

Sulaiman, CIMB: I would love to see more single-A issuers in this market. We've encouraged this but unfortunately we have seen a mismatch of pricing expectations at where the banks are willing to fund issuers and what investors would expect from a A-rated corporate bond. The other issue we have heard from investors is the minimal liquidity of the single-A market which is naturally lower than the double-A market. That de�nitely reduces appetite for single-A credits.

MARC [the Malaysian rating agency] is looking at a partial rating methodology, where lower-rated borrowers can obtain credit enhancement from a third-party. The question for investors is whether they are willing to accept lower yields with an enhanced credit rating and let the guarantor banks pocket the guarantee spreads or alternatively purchase the bonds on a standalone basis and bene�t from the high returns if they are comfortable with the underlying standalone credit? It's a tricky question, and comes down to the balance of liquidity versus the credit spread.

Teo, A�n Hwang: I totally agree that we need more single-A issuers in Malaysia. Pricing is clearly a concern for issuers. There is also a limited pool of investors who can go into the single-A market, so that represents a challenge to the development of the single-A segment of the market. But is something we need to work on.

Chung, Cagamas: Single-A issuers need to pay an excessive premium for illiquid-ity. One of the things that we looked at previously was to have a credit hedging mechanism in place, which should help both the issuers and investors. But now the government has issued guidelines on unrated issuance, the credit hedging mechanism may not be viable in the long-run. That is why we have not pursued this idea. We still need to explore further to see the best way to stimulate the single-A bond market. ◼

CHUNG CHEE LEONG, Cagamas.


26 May 2016 • Centara Grand at CentralWorld, Bangkok

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India Economic Overview

Two years into Narendra Modi’s leadership and India has the fastest growing economy in Asia. It has thrown o� the paralysis le� by the

previous prime minister, Manmohan Singh, with Modi widely seen as the catalyst for the country’s remarkable turnaround.

However, the buzz that brought Modi to power is beginning to fade and people are starting to question why many of the sweep-ing changes he campaigned on remain unaccomplished.

Modi sailed into power in May 2014 on a spectacular show of support from India’s electorate — support shaped by a restless campaign, his reformist agenda and an impressive track record as chief minister of Gujarat state.

But as the momentum slows Modi is le� with some tough expectations to meet. The “big bang” reforms he promised before coming to power included changes in the nation’s tax regime, land acquisition law

and labour policies, as well as the expansion of foreign direct investment (FDI) and strategic divestment in the public sector.

So far the Modi gov-ernment has overseen a recovery that is showing in all macroeconomic indi-cators. Finance minister Arun Jaitley, in his 2016/17 budget delivered on Feb-ruary 29, put GDP growth for the 2015/16 �nancial year at 7.6% — up from 6.3% when the Modi government came to power. The current account de�cit is on target to hit 1% of GDP in FY2015/16, while the �scal de�cit is on track for a manageable 3.5% of GDP for the same period, according to �gures from HSBC. In�ation in January was at 5.7%, down from the heights of 12% in 2013, and looks set to stay where it is, with DBS Bank

predicting a level of 5%-5.5% for FY2016/17 and HSBC expecting it to stay the same.

Modi had a stroke of luck barely two months a�er coming into o¡ce a�er the price of oil (Brent crude) fell by $65 a barrel to less than $50 and kept falling from there. As one of the world’s largest net importers of oil for India the price drop has magni�ed improving economic fundamentals.

The drop resulted in an unexpected wind-fall that helped narrow the net oil trade de�cit from 5.4% of GDP in FY2013/14 to an estimated 2.8% in FY2015/16 — a boon to the current account of a country where 70% of the trade de�cit is led by commodities.

The economy has also had a helping hand from the Reserve Bank of India (RBI). RBI governor Raghuram Rajan began easing interest rates last year by slashing the repo rate down 125bp to 6.75%. The cuts came in four stages, three of 25bp and the fourth of 50bp. The latter, in September, had origi-nally been expected as another 25bp cut. By doubling up Rajan showed the markets that he is capable of strong action. His credibil-ity is evident with the calls to extend to his three year term, ending this September, becoming louder and more frequent.

Reforming a nation: still waiting for the ‘big bang’Modi brought India back from the abyss on the promise of change. It’s now high time for him to deliver. Jonathan Breen reports.

LIFE CYCLE OF REFORMS UNDER DIFFERENT GOVERNMENTS

TIME FOR ACTIONModi needs to capitalise on his support before he loses it.

India Economic Overview-r1.indd 46 31/5/16 6:39 pm



Rajan’s con�dent easing has encour-aged investment simply by showing that such monetary stimulus is likely, even if it is taking banks a while to pass on the changes, said CLSA in a November 2015 report on India’s economy. He still has the opportunity to cut rates this year by another 25bp, say analysts, but the pressure is o� slightly — in�ation is safely near the RBI’s target of 6%.

But a con�dent monetary policy alone is not enough to propel growth. More is needed and sooner rather than later. The shine is fading o� Modi’s popular support and the high from cheap oil is wearing o�. “The incremental bene�t from the drop [in oil prices] will still stimulate the economy this year,” says HSBC’s chief India economist Pranjul Bhandari, based in Mumbai. “But it de�nitely won’t be as much as last year”.

Modi’s election victory inspired a boom in investor and consumer con�dence, but that con�dence and the expectations of Modi “ran into the stratosphere and became unrealistic”, says Singapore-based CLSA senior economist Rajeev Malik.

In recent months those expectations have begun correcting themselves. India’s government has been overcon�dent and without setting realistic goals for the coming year it risks losing its successes amid much more obvious non-action and the accompanying negative sentiment.

“One of the assessments this government got wrong was it initially overestimated its ability to �x problems quickly and underestimated the severity of the eco-nomic problems they were inheriting,” says Malik. “The irony is it is not as if the government has not done anything, but

relative to people’s unrealistic expectations any achievements they have made appear small.”

BIG BANGWhile the Modi government has had its successes, for example, it has been champi-oning a push to expand road construction, India watchers say it’s about time the prime minister delivered on one of his “big bangs”. One such reform is the Goods & Services Tax (GST), considered by some analysts and economists to be the most important reform for the country.

The GST is a tax on the manufacture, sale and consumption of goods and services at a national level. It would replace all indirect taxes levied on goods and services by the central and state governments. It would be a game-changing reform for the economy in developing a common Indian market, said Ernst & Young in a commentary on the tax. It is estimated that India will gain $15bn a year through the GST as it would promote exports, raise employment and boost growth. Many believe it would boost tax collections and India’s economic devel-opment by breaking tax barriers between states and integrating the country through a uniform rate.

“The GST is the most crucial reform for the country at the moment,” says Moody’s Analytics associate economist Faraz Syed, based in Sydney, Australia. “[It] will improve foreign investor sentiment.”

India’s lower house of parliament, the Lok Sabha, passed the GST Constitutional

Amendment Bill in May 2015, planning for it to take e�ect from April 1 this year. But the government has failed to get it passed in the country’s upper house, the Rajya Sabha.

Some government ministers have accused the Indian National Congress (INC) — the main opposition party to Modi’s Bharatiya Janata Party (BJP) — of stalling the GST bill to prevent the prime minister from getting credit for its passage. As the bill pends approval in the Rajya Sabha, where the BJP does not have a majority, the INC is insist-ing the government meet demands which include an 18% cap on the rate, the creation of an independent dispute resolution mech-anism and the deletion of a provision for 1% tax by additional levy. But once it is passed formidable tasks remain. The government must get approval from state governments and state assemblies and is required to put

INFLATION TO UNDERSHOOT JANUARY 2016 TARGET, BUT NOT IN JANUARY 2017

RAJEEV MALIKCLSA

PRANJUL BHANDARIHSBC




the bill into the public domain for all stake-holders to give their views.

However, the problem is no longer just about seeing the GST passed, but about getting a high quality GST, said HSBC in a report on India’s reforms. Estimates suggest an ideal GST could add 1.5%-2% to economic growth but in its current form the potential impact is about 0.6%, according to the report.

The implementation of the GST could be delayed until at least 2017, suggested CLSA in its India 2016 Outlook, but progress will be watched eagerly by international investors. Although foreign investment in India has grown considerably over the past two years, the GST would have the power to attract global investors in much higher numbers by decluttering India’s complex, indirect tax regime and making it easier to do business in India. And foreign busi-nesses will further welcome the GST with open arms as it brings the country into a single market, cutting back arduous bureau-cracy and red tape.

As the GST inches towards passage, foreign investors are increasingly looking at the opportunities in India, say analysts. Modi has helped this by burning a trail around the world in 2015, visiting 26 countries throughout the year, drumming up interest in countries including China, Russia and the US.

FOREIGN DIRECT INVESTMENTLast year India was the largest recipient of foreign direct investment in Asia, growing

by nearly 35% year-on-year, according to Hong Kong-based Medha Samant, an investment director at Fidelity Interna-tional.

“Since Modi, India has been the darling of [foreign] investors,” says Samant. “The reason we have seen this con�dence is investors, like ourselves, are encouraged by the reform that the government has implemented in a lot of areas. So they have shown the potential for long term improvement and that has improved the investment environment.”

Among the changes encouraging FDI is a loosening of restrictions on the limits on foreign investment for various industries. The government last November eased the FDI caps in 15 sectors, raising the For-eign Investment Promotion Board (FIPB) approval limit from Rp30bn to Rp50bn.

The sectors include civil aviation, con-struction, defence and media. Following the change, for example, foreign investors can own up to 49% in defence, with any investment over that limit requiring the nod from the FIPB.

More loosening is expected. “We are going to see more of a liberalisation throughout the year,” says Syed. “It is part of the RBI’s plan to expand India’s �nancial markets in order to bring in more funding from abroad.”

Despite these e�orts, credit growth has been weak onshore and the cost of funding is high because, among other reasons, the number of non-performing assets has grown to more than 5% of total bank credit, worth Rs3.4tr, as of September 2015. Even though the RBI cut rates the cost of funding has not gone down that much — banks are reluctant to pass the cuts on to borrowers because they want to maintain their pro�t margins.

Financing — whether onshore or o�-shore — is desperately needed. “From an infrastructure �nance perspective, it is estimated that India needs about $2tr of �nancing by 2022,” says Nikhil Rathi, CEO and director of international development at the London Stock Exchange. “There can be no single �nancing source so [we] would expect companies to seek a mix of international and local capital to support that.”

India has to sustain the �ow of FDI for the medium to long term, says Japan Vyas, managing director at Indian venture fund Sixth Sense Ventures, otherwise the goodwill and interest generated by Modi’s government will be wasted. But attracting more investment is not a problem, accord-ing to Syed.

“Foreign investors are still waiting on the sidelines of India’s markets,” he says. “They are looking for a good growth story. GDP growth is high but there is still a neg-ative output gap. When some of the bigger reforms come in then investor con�dence will likely rise.”

For investors such as Fidelity, which operates an India-focused fund, the key point for the markets in the short term will be guidance from reforms in India.

“The pace has slowed when it comes to the big ticket reforms, but if you look at the direction the government is taking nothing

INDIA'S RECOVERY MATH SO FAR

MEHDA SAMANTFidelity


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Covering the global economy for 28 yearsCovering the global economy for 28 years

www.emergingmarkets .org news, analys is and opin ion onl ine

By Anthony Rowley

HaruhikoKurodainsistedtodaythathewouldstick

to his monetary policy course, despite mounting

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market, ended deflation and got GDP rising.

But growth has slowed, and even fell nastily in

the second quarter of 2014.

By Thierry Ogier

The world should not fear the Federal

Reserve’s plans to raise interest rates,

current and former policymakers from

three continents have argued. Agustín

Carstens,Jean-ClaudeTrichetandHenry

Rotich said they trusted that the US cen-

tral bank would move “progressively”.

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Kenyan finance minister all argued that

rising rates would be a sign of faster

American economic growth, which

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could avoid what IMF managing direc-

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Don’t fear rate hikes — US

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WASHINGTON DC, OCTOBER 12 2014

SPECIAL DAILY EDITION WORLD BANK/IMF

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Joseph

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For 28 years, Emerging Markets has been at the forefront of the international economic debate. Published daily at the keymeetings of the major international financial institutions, including the World Bank, IMF and the world’s regional developmentbanks, the newspaper is highly acclaimed for its authoritative, incisive and hard-hitting editorial.With its presence at the world’s development bank meetings and its online content, Emerging Markets has access to an audience that includes some of the world’s most influential opinion-formers from both public and private sectors.

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• IMF & World Bank Annual Meeting9–11 October 2015, Lima, Peru

UPCOMING EDITIONS

“As a regular participant in these

meetings, I have always been a

dedicated reader of Emerging Markets

of which I think very highly”

Jacob Frenkel, Chairman of JPMorgan Chase International;

Chairman, Group of Thirty

Untitled-5 1 20/08/2015 17:46



has changed,” says Samant. “Markets in the short term are down and there is a very negative sentiment. But long term, because of the reform environment, equities in India are very promising, more so than any other market in the region.”

International investors are being drawn by a number of high quality opportunities. Many of the potential investments are in government-owned blue chip companies. And the government has a wealth of stock, which it is looking to sell to boost its resources. But this year it has not managed to o°oad anywhere near as much as it wanted to. The government has been grasp-ing at strategic divestment opportunities but, as with previous regimes, it has been setting targets too high.

But the demand is there — India in February sold 5% of its shares in NTPC, the

country’s largest power producer, easily raising Rp50.3bn as institutional investors pounced on the o�ering. The sale’s non-re-tail portion closed with demand over 1.81 times the stock available.

STRATEGIC DIVESTMENTModi has shown he is serious about divestment by reviving India’s Disinvest-ment Commission, which oversees the sale of government holdings. The last such panel was wound up in 2004 a�er the United Progressive Alliance, a coalition of centre-le� parties, was voted in to power. The �rst Disinvestment Commission was set up in 1996 and two subsequent panels recommended strategic sales in some state-run companies.

But the government has been strug-gling, apart from a handful of times, to get to the point of actually executing divestment deals. One of the largest being worked on is for Coal India, yet it has stalled as the government waits for prices to edge back up higher. But to meet targets it has to capitalise on demand when it can, say Indian capital markets bankers. It has had opportunities to o°oad the 10% marked for sale in the coal mining company, which could fetch $3bn, but has held o� to wait for price levels in the market to return to where they were at the heights of 2015.

Consequently, the Indian government is going to miss, in spectacular fashion, its Rp695bn disinvestment target for FY2015/16. One month before the end of the

�nancial year it was short by a whopping Rp512bn.

“Governments have overestimated divest-ment targets for years and that has to be changed,” says Malik. Part of the problem, he adds, is when markets dip, “the government shrinks like a tortoise into its shell and says [it] will do more when markets recover.”

But India’s leadership is at least trying to be more realistic. Finance minister Jaitley announced in his third budget a shrunken disinvestment target of Rp565bn. But despite the smaller size, it still includes a Rp360bn goal for the sale of stakes in companies such as Coal India, ambitious considering the most ever raised in this way since 1992 is Rp243bn.

“The government will need to be disciplined, divesting irrespective of the market’s ups and downs,” says Malik. “Whether they can hit [this year’s] target will be based on how they approach it.”

Revenues raised from stake sales are not as much of a drag on economic growth as revenues gained via other means, such as higher taxes. And the government has a lot to sell.

“It is the best way to raise revenue at this point,” says HSBC’s Bhandari. “This is one area that the government has to show they are doing something.”

Jaitley announced another step in the right direction in his budget — a new policy has been approved to manage the government’s holdings in public sector undertakings (PSUs).

“We have to leverage the assets of [cen-tral public sector enterprises (CPSEs)] for generation of resources for investment in new projects,” he said. “We will encourage CPSEs to divest individual assets like land, manufacturing units, etc, to release their asset value for making investment in new projects.”

The move is just a part of the govern-ment’s plan for the next year to “transform India”. Jaitley laid out nine pillars as part of the transformative agenda, largely focused on the rural sector and welfare, as well as business, investment and �nancial reforms.

“Hopes for any incremental growth beyond what we have today will depend squarely on the implementation of impor-tant reforms,” said Bhandari in a recent report on India’s growth in 2016. “In short, it’s over to the government.” ◼

INDIA'S INTERNATIONAL INVESTMENT POSITION

JAPAN VYASSixth Sense Ventures



HK Stars Index

By the time Martin Winterkorn, the former Volkswagen CEO, arrived at his o�ce on September 21, 2015, his company had lost 20% of its market value. By the end of the next day, VW had lost a further 17%.

The reason for this value shock was the news that the com-pany’s so�ware had misrepresented emissions on roughly 11 million cars worldwide. A governance �aw was revealed with titanic consequences. Governance gaps, or �aws, pervade the global corporate environment, which is why investors have been demanding more transparency and improved governance prac-tices for decades.

Unfortunately, the case of VW is no anomaly. Instead, VW is only the most recent example of a global company to have fallen from grace as a result of internal (also known as endogenous) risks playing out. Some of the most infamous corporate shocks have come from underpriced internal risks which can range from rogue trading and accounting fraud to disgruntled or misguided employees in research and development. For example, over 30% of cyber breaches are committed by employees and internal sources, according to an IBM report from 2014.

These �aws have brought down the biggest, oldest and most reputable companies including AIG, Enron and Lehman Brothers.

Internal risks — the hidden company killersInternal governance related risks can easily total 2x-5x of the risk priced into companies by investors and executives, write Vivian Chow, William Cox and Mathew Garver.

M&E BDO ASIAMONEY HONG KONG STARS INDEX vs HANG SENG INDEX, HANG SENG COMPOSITE INDEX AND HANG SENG CORPORATE SUSTAINABILITY INDEX

140

130

120

110

100

90

80

70

SOURCE: M&E; BDO

M&E BDO AM Stars Index

Hang Seng Composite Index

Dec-

10Ja

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Mar

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May

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1Se

p-11

Nov-

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Mar

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May

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Oct

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b-14

Mar

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Mar

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Hang Seng Index

Hang Seng Corporate Sustainability Index

Basi

s po

ints

HK Stars Index-r4.indd 51 31/5/16 6:41 pm


HK Stars Index

NO FOREWARNINGRegulators such as the Securities and Exchange Commission and the Bank for International Settlements are aware of the problem and so have set out detailed guidelines on how com-panies should report their internal and external risks. Some companies, such as airlines and oil companies, have to detail 10-15 risk types in their publicly available risk reports. Yet there is no mechanism to forewarn investors or to financially quantify these risks. When bad news hits, markets are unpre-pared and investors push the sell button.

More is being done. Countless non-governmental organisa-tions such as Coso (Committee of Sponsoring Organizations of the Treadway Commission) and auditing �rms, including Price-waterhouseCoopers, have published frameworks to improve companies' risk management. Most involve improved oversight processes and a more active role for board committees such as the audit committee. This is having some impact as a March survey by PwC of 1400 bank CEOs shows that 64% intend to restructure their risk management. In addition, two thirds see cyber risk — a major internal risk —as a barrier to growth.

Yet investors, and probably most executives, cannot monitor growing internal risk, much less factor it into their required rate of return of the equity or debt of a company. This is because investors still use old models, such as the Capital Asset Pricing Model, which largely only quantifies the risk of fluctuations in stock prices and benchmarks but omits inter-nal risk factors.

GLOBAL COMPLEXITYWhat makes the internal risk issue so acute today?

One contributing factor to skyrocketing internal risk is the long bull market. Since the beginning of co-ordinated QE action by central banks policies, equity markets have risen steadily producing the second longest bull market in history. As a result, companies have been focused on growth and not limiting risks.

Another factor is the complexity of global operations. A 2015 study by the National Association of Corporate Direc-tors of global companies with total assets of over $16tr lists oversight of risk factors as among the prime challenges for directors. With 55% of global growth to come from emerging economies by 2019, the differences in regulations, governance and culture make controlling risks tough across international operations.

Reputation risk is a further threat. Eighty four per cent of S&P500 company values are intangible assets, which include elements such as intellectual property and reputation, accord-ing IP specialists Ocean Tomo. Yet these areas are particularly vulnerable to mood swings which are intensified by social media and jittery investors. The case of Arthur Andersen — the accounting firm which failed following the publicity linked to its role as Enron’s auditor — reveals how fast revenues can dry up in the light of reputational collapses.

The problem with internal risk is that it's hidden and not factored into company valuations. Internal risk is often

misunderstood and inevitably underestimated and therefore, mispriced. Calculations by Management & Excellence (M&E), estimate that the internal risk is normally between 2x and 5x the current discount rate. This means that investors are mas-sively overpricing their investments in companies and are not getting nearly the returns they should in view of these high risk levels.

Its most perfidious characteristic is that institutional inves-tors rarely understand, let alone attempt to quantify, these value-bombs nor their explosive consequences. It's like an ice-berg which is largely underwater and can sink a big ship. The implications for investors are clear. Simply stated it leads to an over valuation of asset prices and underestimation of inter-nal risks. An investor buying company paper with a weighted average cost of capital of 15% might really be entering into a risk of 50%.

The table above shows M&E's estimates of discount rates reflecting embedded risk in 10 of Hong Kong's leading blue chips. These estimates are based on public information that is available to all investors. Internal audits of these companies would certainly yield more accurate internal risk discount rates. It’s worth noting that the relatively weak transparency of HK and Chinese companies is likely to skew these estimates more than in the case of US, European or even Brazilian listed firms.

M&E's calculations show that companies with top govern-ance scores and records generally incur only a third of the internal risks of poorly governed companies. ◼

William Cox is CEO of Management & Excellence (M&E) and received his PhD from the London School of Economics. Mathew Garver is President of M&E and received his graduate finance degree from Oxford. Vivian Chow is Senior Manager in the Risk Advisory Services at BDO Financial Services, Hong Kong and graduated from the University of California. M&E and BDO co-operate in Asia in offering RoI of intangibles services.

M&E Internal Risk Rank Company Discount Rate (estimated) 1 Standard Chartered 35.1% 2 CLP 36.2% 3 HKEX 40.0% 4 Power Assets 40.2% 5 HSBC 40.8% 6 Swire Paci�c 40.9% 7 Henderson Land Development 42.5% 8 Prudential 43.5% 9 Link Reit 44.8% 10 Hongkong Shanghai Hotels 45.3%* The Internal Risk Discount Rate™, a proprietary method of M&E, is added to the existing company discount rate; the Internal Risk Discount Rate is an estimate of all internal risk, such as governance, legal, compliance, reputation & cyber risks. A lower rate re�ects lower risk and is better.

SOURCE: M&E; BDO

ESTIMATES OF INTERNAL RISK DISCOUNT RATES™ FOR 10 LEADING HK COMPANIES*

HK Stars Index-r4.indd 52 31/5/16 6:41 pm

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