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| Ingrid Hengster, RBS Country Head, Germany, Switzerland and Austria |
Only a handful of European and US firms have launched renminbi-priced bonds for Chinese investors, put off by tight regulation, a shallow investor pool and easy funding in the West. However, taking the easy option out would be to ignore a clear strategic rationale for getting into China’s capital markets. First, the far bigger Asian marketplace means it makes sense to finance and fund projects in the currencies of that region and pool money there rather than repatriate it. The renminbi, as south east Asia's FX anchor and currency of its biggest economy, is an obvious first destination. Malaysia's burgeoning sukuk market and Indian rupee bonds are among several others that deserve closer attention from European corporates.
It is also smart business to diversify some of their funding base into renminbi. Record low yields might mean there has never been a better time to borrow on the European or US debt markets, but investor sentiment must turn at some point. When it does, the companies best placed to tap new sources of funding will be those with experience and a respected track record in alternative markets like Asia.
Visiting German companies in the region recently, the importance of brand image was obvious. Projecting a strong identity to local banks, regulators and local investors is just as important a task as marketing to consumers. European companies used to Western investors’ focus on credit ratings and quarterly earnings need to grasp that the equivalent roadshow in China would need to focus far more on the power of its brand and on long-term performance.
In addition, locally-denominated bonds are becoming a useful tool for companies such as carmakers. China’s newly acquisitive consumers have discovering credit as a way to pay for big ticket items and Asian subsidiaries of European companies need strong local currency cash-flow to finance that demand.
Since strict regulation over exchange controls snarls up transfers from the parent company, locally-denominated bonds offer a useful source of additional funding.
The renminbi-denominated international bond market remains a minnow relative to the economic clout of the wider Chinese economy. The renminbi may have become a far more international currency over the past three years but renminbi-denominated bonds – issued both inside and outside China – represented just 0.4 per cent of the global total last year. Individual bond issues also remains small – typically USD50 million to USD200 million in size.
More intense regulations are one reason why. The People’s Bank of China must approve every bond offer for example, even if that same company launched an issue months earlier. The regulator also retains the right to decide whether foreign firms can reinvest the funds back into China.
Greater foreign issuance in China will depend on the pace of further liberalisation of the foreign exchange rate market and the eventual removal of capital account restrictions by the country’s new leadership. If China is able to push through most of the ambitious reforms championed by Premier Li Keqiang, the renminbi could be a reserve currency and the world’s second largest in 15 years’ time. Even with more modest reforms, the renminbi should see it on a par with the Australian or Canadian dollar.
In the meantime, it might be tempting for European finance directors to view China’s capital markets as a distraction to their day job sourcing billions from the dollar and euro funding markets. However, doing that would risk putting those firms at a long-term disadvantage to more far-sighted foreign rivals. Pursuing even a small issue now will help firms to familiarise themselves with the regulatory environment, build a name and send an important signal of their commitment to the Chinese market.
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