When the People’s Bank of China (PBoC) announced in January that they were restricting net outflows of RMB within cash pools outside of China, it reintroduced questions about how accessible liquidity really was in China, suggesting to some that investment in China may be less attractive. While corporates with different time horizons will have different reactions to this kind of short term decision, what shouldn’t be overlooked is the opportunity to earn attractive returns on cash on CNY balances within China.
While interest rates and short term investment yields in the US and Europe remain low (or negative, in some cases), China’s monetary policy has been different. Although rates may be on the decline in 2016 as the government takes strides to manage economic growth, interest rates remain higher in China than in the west. Couple that with advancements and deregulation across a familiar (to western treasurers) set of investment options, and the opportunity to earn returns on cash in China is attractive.
A quick review of the investing landscape will help to illuminate what opportunities treasurers have:
Last April, the Chinese government launched a deposit protection program, not incredibly dissimilar to the FDIC insurance offered in the United States. This program offered clarity around what level of deposits were protected, delivering certainty around what cash would be protected in a dire scenario of bank failure. While there had been a general assumption that all deposits in Chinese banks would be protected – a “too big to fail” theory – this was never fully accurate so the specifics around this policy provide assurance to corporate treasurers
Over the past couple years the PBoC has removed both the floor and ceiling on interest rates that may be offered by banks to attract corporate cash. This offers commercial banks operating in China more latitude to offer flexibility in instruments that offer reward for greater risk, as we would see in western nations. Instruments such as negotiable CDs (or NCDs) have become popular as they are based on SHIBOR (Chinese Libor, effectively) and are covered under the deposit protection programs the government recently introduced.
Money Market Funds
MMFs have existed in China for over a decade, yet recently have benefited from new regulation from the CSRC (Chinese Securities and Regulatory Commission). While not an exact parallel to MMF regulation to be implemented in the US next year and in the EU thereafter, the requirements to increase cash components of funds and restrict the types of assets that can be invested will sound familiar to those following these regulations in other markets. In short, the objective to provide more liquidity and limit credit risk will meet Treasurer’s needs for safety and preservation of capital – even if a little bit of return may be sacrificed to achieve that.
Other Investment options
Because of the higher interest rates seen in China, the demand for alternative investments such as reverse repos and separately managed accounts (SMAs) hasn’t been high. It is not improbable that such strategies would be permissible in the future, but there would need to be a significant thirst for these options which does not exist today.
Overall Liquidity Picture
The strategies implemented by the PBoC and regulatory arms of the Chinese government have created a safer and familiar investment environment for American and European corporations maintaining cash balances in China – as well as those that are considering the benefits of investing further in the region and evaluating the ROI of these strategies.
Combined with the deregulation supporting onshore/offshore sweeps to facilitate China being part of global cash pools, there are many developments in China to pique a Treasurer’s interest.