CNH: Qianhai to offer CNH trust products

类别:投资策略 机构:DBS唯高达香港证券有限公司 研究员:唯高达香港证券研究所 日期:2013-05-16

According to the media, the Qianhai Equity Trading Center, which is expectedto commence operation this month, will provide loans to Qianhai enterprisesby launching RMB-denominated wealth management products (WMPs) on theHong Kong capital market. These WMPs are pledged by assets of small- andmedium-sized enterprises. Given the higher risk profile of these enterprises,the yields are expected to reach as high as 10%. Private banking clients as wellas private equity firms in Hong Kong will be the target group of investors.

    Four implications of the initiative:(1) Since November 2012, RMB deposits in Hong Kong have started growingagain after stagnating for a year (Chart 1). In further relaxing currency flowsbetween Qianhai and Hong Kong, offshore investors now have an additionalavenue into RMB investments.

    More importantly, thedouble-digit rate of returnis relatively attractive comparedwith the average 2.5%and 4.0% yields for RMBtime deposits offshore anddim sum bonds respectively(Chart 2). While further detailsare not available at thetime of writing, the structureof such WMPs is likelyto be similar to those thatonshore banks issue throughtrust companies. However,they should be subjectedto more stringent regulatorycontrol since any failurewould undermine investorconfidence over the futurefinancial reforms in the city.

    (2) The new scheme, alongside the RMB cross-border loan program kick-startedin January, will provide channels for Qianhai firms to tap “cheap” offshore funding,which in turn, would enhance their operating margin. SMEs on the mainland,especially those that have long struggled to raise funds from the largestate banks, will also benefit. The smaller amounts accessible from Hong Konginvestors or banks with more established SME lending policies will be of greatvalue to them (see “RMB lending set to cross border in pilot plan”, 16 April 2012).

    (3) The latest initiative also signifies China’s determination to push forward capitalaccount liberalization. It allows Beijing to test the regulatory procedures aswell as the operational risks of cross-border financial activities. That echoes withthe policy moves and speeches made recently by other Chinese regulatory bodiesand senior officials. To encourage FDI into China, the State Administration ofForeign Exchange (SAFE) simplified the procedures of forex registration, forex account opening, and forex settlement last week. In April, Yi Gang, the Vice Governorof the People’s Bank of China, said that the authority is planning to widenthe USD/CNY’s trading band in the near future to better reflect market forces.

    (4) The impact of the scheme on offshore RMB liquidity should be limited.

    In particular, the program will likely be monitored under a quota system. Ifneeded, the regulators could divert more RMB flows to the offshore market.

    One of the policy considerations is to allow Hong Kong banks to access theonshore interbank market for funding. Meanwhile, the authorities can alsoencourage more RMB use in outward direct investment, where growth haslagged RMB-denominated foreign direct investment. Other policies on thecards include relaxing the RMB daily conversion limits for Hong Kong residentsand allowing RMB outward remittances for mainland individuals andcorporates (see “CNH: Replenishing offshore RMB liquidity”, 13 Dec 2012).

    What’s next?

    Following the launch of CNH trust products and cross-border loans, the scopeof RMB business between two jurisdictions will be further enhanced. For instance,the authorities are planning to allow Qianhai companies to directlyissue dim sum bonds in Hong Kong. Individual investors in the city might beallowed to participate in the RMB-denominated version of Qualified DomesticInstitutional Investor program (RQDII2). Chinese regulators have also reportedlygiven the green light for offshore companies to set up private equityfunds in Qianhai. If such pilot programs succeed in Qianhai, we expectthem to be implemented gradually in other cities of China. The experimentationin Qianhai will provide valuable references for the nation as a whole.

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