UNLIKE YOUR USUAL deal roadshow, this one involved white ties and tails, tiaras and a ride on a horse-drawn gilded carriage through the streets of a great capital. Well it beats throwing up in the backstreets of Hong Kong’s Wan Chai or Korea’s Itaewon, which is often the standard culmination of the Asian roadshow.
Of course I’m referring this past week’s state visit of China’s President Xi Jinping to the United Kingdom and the attendant pomp and circumstance that seems to be Britain’s remaining unimpeachable brand.
But, although billed as a state visit, it was in essence a public relations exercise – a roadshow, if you will – aimed at repairing the image of China in the minds of the global investment community after the damage inflicted by the country’s collapsing stock markets and shock renminbi devaluation over the summer. The same was true of the state visit President Xi made to the United States at the end of last month.
Sure, some large investments were announced during the visit, including China’s sponsorship of the construction of nuclear power plants in the UK – decent fodder there for the paranoiacs of Britain’s China-bashing community. But, to my mind, this was about putting some positive spin onto the tarnished image of China Inc.
And let’s put it in the context of what has been happening back in China on the capital markets front. There it seems to be all about opening up markets in what might appear to be a knee-jerk reaction to the summer stock market slump, together with an acceptance that the country’s once-stratospheric GDP growth rate is slowing.
SO, CENTRAL BANKS and sovereign wealth funds will now be allowed access to China’s domestic bond markets as will a range of qualified international investors. And the Panda bond market, which allows international entities the ability to issue in renminbi in China’s domestic market, looks set to take off after years of anticipation by the global investment community.
The People’s Bank of China recently announced approvals for the Hong Kong subsidiaries of HSBC and Bank of China to price Panda bonds, and issuance quickly ensued. Meanwhile, deals are being lined up for real estate developer Country Garden and China Merchants Group.
Still, a Singapore-based DCM head told me last week that he doubted a full-scale Panda bond issuance bonanza was on the cards. He observed that apart from the fact that there seems little transparency right now in terms of just who can issue and what they can do with the proceeds, there are a number of prohibitive hurdles the issuers must jump over before bringing deals to market.
So, potential issuers must get a domestic credit rating and present accounts that comply with Chinese GAAP regulations. And if the coupon prints aren’t likely to be competitive versus what can be achieved in the offshore US dollar markets, then potential Panda issuers will take the latter route.
One thing’s for sure: despite the re-rating of China in the minds of investors after the summer’s seeming apocalypse, the onshore markets in the country are awash with liquidity. That money needs to be invested, presenting an attractive investor diversification opportunity for Panda bond issuers.
And although there may be question marks surrounding the credit element of the China debt product equation as the economy slows – despite the fact that, at the moment, China’s corporations are able to rebalance their liabilities and refinance with ease – the rates element looks just perfect.
Its core purpose was the smoothing of the way for the renminbi to become an international reserve currency
RATES HAVE BEEN cut by the PBoC five times since November and are likely to be cut further as the economy slows. Moreover, the entry of a new group of offshore investors into China’s domestic bond market also looks likely to put downward pressure on rates across the yield curve.
My DCM banker suggested that, although the mindset towards China as an investment proposition has become more sanguine and relaxed over the past few months, there is still fear over the “black box” nature of the economy and the country’s domestic financial markets.
“There seems always to be the potential for nasty shocks across the board, whether it’s an out-of-the-blue currency devaluation or the discovery that a well-rated company can’t service its debts. And that isn’t going to go away any time soon as headline risk rises,” he said.
To go back to London and the red carpet pageantry, it’s worth remembering that the big China PR exercise helmed by Mr Xi has as its core purpose the smoothing of the way for the renminbi to become an international reserve currency.
The first hurdle to jump is the acceptance of the currency by the International Monetary Fund as a constituent of the Special Drawing Rights basket. The IMF will be making a decision by yearend on whether to include the renminbi in the choice group of currencies which make up the IMF’s own de facto currency unit.
That decision will depend on how freely usable the Chinese unit is. Well, more and more of the world’s trade is denominated in renminbi. And last week’s renminbi issuance out of the UK showed Britain is playing its part. I can’t yet say whether that makes me proud to be British but there’s nothing like being Royally entertained in that country to add lustre to a tarnished brand.
