An Executive Interview with Kheng Leong (KL) Cheah, Head of J.P. Morgan Global Liquidity Sales, Asia Pacific
In this month’s Executive Interview, KL Cheah, Head of J.P. Morgan’s Global Liquidity Sales for Asia Pacific talks to Helen Sanders, Editor, about the recent regulatory changes for China on-shore RMB money market funds (MMFs) and the impact on corporate cash investors in China.
What particular investment considerations are important for corporate investors in China?
Unlike their retail counterparts, corporate investors tend to look for investments that support their wider business needs rather than solely focusing on high returns. In addition, corporate treasurers view both liquidity and strong credit quality as an important consideration in their investment portfolio; in order to readily provide for day-to-day business operating costs, and to best preserve capital, respectively. Hence, corporate treasurers actively seek investments which allow flexible liquidity, as well as effective credit risk management.
Also, more rigorous risk and credit analysis is critical for corporate investors as there has been a big increase in credit defaults since 2015. For example, the number of credit defaults during the first quarter of 2016, was equivalent to the whole of 2015. As MMFs amply fulfil the corporate investment objectives of capital preservation, flexible liquidity and market driven yields, it is not surprising that there has been significant corporate investment growth in the MMFs space in China over the past few years, a trend that is likely to continue in the near future.
What likely impact will recent regulatory changes introduced by China Securities Regulatory Commission (CSRC) have on corporate investment in MMFs?
As China develops a more open market, we are seeing more and more regulatory activity to support this evolution. For example, in order to align domestic financial instruments in China with equivalent instruments outside of China, CSRC introduced new money market fund (MMF) regulations in February 2016 which resulted in a number of obligations for fund managers to bring MMFs in China more in line with MMF offerings globally; such developments include more proactive credit controls, stricter liquidity management and greater transparency in fund disclosure.
As yet, it is still too early to say what impact these changes will have on investor appetite for MMFs, but many of the MMF providers in China are finding it difficult to adhere to the more stringent guidelines. However, the recent CSRC changes will have little or no impact for investors of MMFs which are AAA rated by international ratings agencies (such as the CIFM RMB Cash Liquidity Fund and CIFM RMB Money Market Fund [1]), as international ratings criteria are already more rigorous than the new CSRC regulations.
Can China on-shore MMFs be considered the equivalent to short-term MMFs in Europe or 2-a7 funds in the United States?
This is the direction in which they are moving towards but there are still some significant differences between China on-shore MMFs and MMFs domiciled in the United States and Europe. For example, leverage (the act of borrowing monies to purely invest in additional securities) is not permitted in the United States, and is limited to only 10% of overall assets in Europe whilst the majority of Chinese MMFs still permit up to 20% of leverage on overall assets [2]. In addition, US and European MMFs have a maximum WAM of 60 days and WAL 120 days, compared with 120 days and 240 days in China, respectively. Other key differences also exist, so corporate investors need to be clear about the characteristics of MMFs in each region, and define their cash investment policies accordingly.
Given the changing market and regulatory environment, what actions would you recommend to corporate investors in China?
Corporate investors need to ensure that they have a robust investment policy that clarifies and adheres to the company’s risk appetite. Larger multinationals typically already have a clear investment policy in place, but their global policies may need to be tailored for specific investment conditions in China. Also, Chinese businesses that have been accustomed to a largely protected investment market now need to be more aware of the risk factors involved with on-shore investment so they are better able to make investment decisions in an increasingly deregulated China market.[[[PAGE]]]
To what extent are corporate treasury departments in China equipped with the skills and technology to manage cash investments in line with industry best practices?
Global multinationals often have significant depth of investment skills at a headquarters level, but many of these managers outside China lack specific local market, regulatory and investment product knowledge in China. Treasurers and CFOs located outside China need to be aware of the differences in the financial markets and specific financial instruments in China, market dynamics and factors driving the ever-changing regulatory environment, in addition to the opportunities and constraints relating to China on-shore investment activity.
Chinese corporations have often brought in expertise from foreign multinationals, and work with global investment advisors and banks to share experiences, develop best practices, and deepen investment expertise within the business. That is how a global liquidity solutions partner such as
J.P. Morgan can add value by helping Chinese corporations strike the balance between international and local investment parameters, and to provide beneficial risk management capabilities.
Also, Chinese corporations often lack the tools and technology adopted by foreign multinationals to transact, manage, value and account for investments, which is an area on which these businesses should focus, especially when we are seeing many of these Chinese corporations starting to expand globally. Online trading and account management systems such as J.P. Morgan’s Global Cash Portal (GCP), allows corporate treasurers to execute trade orders and obtain a real-time snapshot of their company’s cash holdings and investments across various currencies, resulting in increased efficiency with less manual effort. GCP can also be simultaneously accessible to an entity’s entire treasury function, even if individual users are based in different locations around the world; which is helpful for multinationals in China that are headquartered overseas, as well as for Chinese corporations that are increasingly setting up remote operations abroad as they expand outside of China.
How do you see the investment landscape evolving in China over the next year or so?
China has embarked on a clear path to migrate its financial markets from being government-directed to market-led, with greater transparency and openness. We expect this journey to continue as the 2020 target approaches for Shanghai to become a global financial centre, but this will not always be a linear process, and investors should expect small steps and variable timelines, rather than many drastic changes taking place too quickly. Although the government is keen to avoid short- and medium-term stresses which create investor uncertainty, investors should expect continued market and regulatory developments, and therefore should structure their investment policies and strategies accordingly. MMFs can fulfil a valuable role for corporate investment strategies which focus on capital preservation, flexible liquidity and market driven yields, but it is essential that the corporate treasury function have the skills and experience to understand the nature of these instruments and the risks associated with any type of investment activity.
Notes
1 CIFM RMB Cash Liquidity Fund and CIFM RMB Money Market Fund (‘The Funds’) are for qualified China domiciled investors only. The Funds are managed by China International Fund Management Co., Ltd. (CIFM). CIFM is a joint venture between J.P. Morgan Asset Management (UK) Limited and Shanghai International Trust Co., Ltd.
2 ‘Money market funds in China become less systemically risky’; Brookings.edu [http://www.brookings.edu/research/opinions/2016/05/16-money-market-funds-china-less-systemically-risky-pozen]; as of June 20, 2016.
