Understanding RMB Liquidity - HSBC
Understanding RMB LiquidityThe investment case, challenges and changesMay 2019The information contained in this publication is not intended as investment advice or recommendation. Non contractual document. Thiscommentary provides a high level overview of the recent economic environment, and is for information purposes only. It is a marketingcommunication and does not constitute investment advice or a recommendation to any reader of this content to buy or sell investments norshould it be regarded as investment research. It has not been prepared in accordance with legal requirements designed to promote theindependence of investment research and is not subject to any prohibition on dealing ahead of its dissemination. The performance figuresdisplayed in the document relate to the past and past performance should not be seen as an indication of future returns. Any forecast,projection or target where provided is indicative only and is not guaranteed in any way. HSBC Global Asset Management accepts no liabilityfor any failure to meet such forecast, projection or target
ContentsChina’s money market funds: A large and evolving marketp. 3Themes for RMB liquidity – Demand for the RMBp. 4Themes for RMB liquidity – Strong digital economyp. 5Potential for further growthp. 6Factors unique to RMB money market fundsp. 7Regulatory developmentsp. 8HSBC’s RMB liquidity offers a strategic advantagep. 9Why HSBC as your liquidity partner?p. 102
China’s money market fundsA large and evolving marketChina’s money market fund industry has come a long way, in a very short amount of time. Within 10years, total assets in money market funds have gone from less than RMB 300 billion to RMB 8trillion (USD 1.2 trillion) today. The asset class was thrust forward in 2013, when an internet fundlinked to a third-party payment platform burst into the scene, dominating the market and starting anew wave of online money market funds. Retail investor interest in money market funds wasintensified largely due to developments in China’s e-commerce and internet finance platforms,which made accessibility to money market funds easier. Expansion of the industry during the 2013period was primarily driven by retail investors, but over the years that followed, institutional assetsalso poured into the asset class. Today, institutional investors make up one-third of the currentinvestor base in China’s money market funds.Money market funds are a significant component of the mutual fund industry in China, making up astaggering 60% of the total. Such a composition is vastly different from Europe and the US, whereequity mutual funds dominate the mutual fund industry. Beyond the domestic markets, China’smoney market fund industry has grown to be the second largest in the world1.But alongside the expansion seen between 2013 to 2018, concerns of concentration risk, liquidityrisks, potential systemic risk and issues around transparency have transpired and regulators havestepped in to issue new rules in order to curb growth and protect investor interest. While the newrules are effectively creating a higher entry barrier and causing a disruption for certain products,they do imply a strategic advantage for funds that are operating by global standards and adopting abalanced approach of aiming to preserve capital, manage risks, and provide liquidity, along withfocusing on yield.China’s money market funds – sharpgrowth from 2013Money market funds make up 60%of China’s mutual fund industryRMB billion90008000QDIIEquity oney 03/1512/1509/1606/1703/1812/180Source: Asset Management Association of China, Wind, as of March 2019Note 1: Source: ICI as of March 2019Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. HSBC accepts no liability for any failure to meet suchforecasts, projections or targets. For illustrative purposes only.3
Themes for RMB liquidity – Demand for the RMBDemand for RMB liquidity A number of catalysts are in place to enable faster growth of RMB usage internationally, including theemergence of a cashless society with digitalization and mobile services that expand RMB usage, benchmarkinclusion of onshore equities and bonds, progress of China’s Cross-border Interbank Payment System (CIPS)and greater use of the RMB in commodity tradingCommercial banks outsourcing liquidity management to asset managers as well as foreign companies inChina requiring RMB liquidity solutions are adding to the institutional growth in the money market industryChina has been steadily opening up its capital markets to foreign investors, and major global index providershave been making significant changes to include domestic RMB assets into their widely tracked indicesThese changes are expected to drive hundreds of billions of dollars of inflows into RMB assetsThe opening up of Chinese bond markets would translate to increased allocations by global FX reservemanagers to RMB assetsRMB is the 5th most active currency fordomestic and international paymentsRMB internationalisation is supported byChina’s growing weight in global tradeCurrency share of total domestic & international payments (Feb 2019)USD billion (2013-2017 average of select naGermanyJapanFranceUK35%Goods & services exportsGoods & services importsSource: SWIFT, Bloomberg, CEIC, HSBC Global Asset Management, as of February 2019Index inclusion to drive inflows into RMB assetsEstimated inflows intoRMB assetsGlobal IndexAsset classTime periodBloomberg Barclays GlobalAggregateChina onshore RMB bondsPhased-in inclusion in April2019 to November 2020 USD 150 billionMSCI Emerging Markets& other MSCI indicesChina A-share equityMay 2019 – November 2019 USD 70 billionSource: Bloomberg, HSBC Global Research as of April 2019Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. HSBC accepts no liability for any failure to meet suchforecasts, projections or targets. For illustrative purposes only.4
Themes for RMB liquidity – Strong digital economyA strong digital economy is supportive of continued retail flows E-commerce growth and related technological advancements have been fundamental to the massive inflowsinto money market funds. Retail investors were able to invest miniscule amounts into such internet funds – thiswould have been previously unfeasible China’s main money market player is operated by a Chinese e-commerce platform operatorChina’s online retail sales seeing steady growthDigital payments expected to continue to growOnline sales in RMB billionTransaction value in digital payments, estimated (USD 016201720182019e2023eSource: Statista as of April 2019Source: National Bureau of Statistics PRC as of April 2019Still relatively low internet penetration in China indicating further growth potentialInternet Saudi 58%South Africa64%South Korea95%Australia88%Source: Statista as of January 2019Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. HSBC accepts no liability for any failure to meet suchforecasts, projections or targets. For illustrative purposes only.5
Potential for further growthGrowth potential still exists for the Chinese money market fund industry Although the RMB money market fund industry has seen substantial growth over the years, it is worth notingthat the total size of its assets makes up only 4% of China’s money supply (M2). This is much lower thancorresponding data from the US and Europe There is plenty of room to grow with domestic investors gradually adopting money market funds as a lowerrisk alternative to equity or fixed income funds and potentially higher-returning option to traditional depositsRMB money market funds make up a smallportion of broad moneyMoney market funds are good options for yieldand daily liquiditySize of money market funds as % of money supply (M2)%76China54Europe32US14Q 20181Q 20177D repoSource: Bloomberg, ICI Worldwide Market Data, HSBC Global AssetManagement, as of March 2019O/N SHIBORDeposit rateSource: Bloomberg, AMAC, as of April 2019Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. HSBC accepts no liability for any failure to meet suchforecasts, projections or targets. For illustrative purposes 1515%01/1510%07/145%01/1400%
Regulatory developmentsFactors unique to the RMB money market industry are also factors that have led tothe implementation of new regulations in China in the recent yearsInvestorconcentration riskPrior to 2017, therewere no rules oninvestor concentration,leading to theformation of a numberof funds with a single,large institutionalinvestor. These fundsface significant liquidityrisk.Lack of ratings byglobal agenciesLiquidity riskChinese regulations allowmoney market funds tohave longer weightedaverage maturities andweighted average livesthan their globalcounterparts. Thisincreases the liquidity andcredit risk inherent in RMBmoney market funds.Of all the moneymarket funds availablein China, there are onlya few products, all runby joint ventures withinternational assetmanagers, that arecurrently rated byglobal rating agencies.Focus on yieldMany RMB moneymarket funds employleverage, invest in lessliquid and lower qualityassets, or concentratetheir holdings to improveyields. Many fundsmarket themselves aslow risk but invest in awide variety of assets.TimelineConvergence of regulatory standards The increasing size and influence of the industry and therelatively lax regulatory environment have prompted theChina Securities Regulatory Commission (CSRC) to issuerules in 2017, targeting investor concentration, disclosurerequirements, and risk provisions These rules strengthen guidelines on the liquiditymanagement, particularly within institutional money marketfunds with concentrated investor bases Further, in 2018, rules were introduced to cap dailyredemptions to RMB 10,000 for T 0 redemptions. Whilethis is not an attractive proposition for institutional investorswith large ticket sizes, this does tackle the issue of liquidityrisk in times of market stress, given that the averageholding per investor was found to be RMB 10,000 Regulatory developments are a significant step forwardtowards harmonising the policies in China with globalprinciples around sound liquidity management New funds with single investor holding exceeding 50% ofthe fund are subject to valuation at market-to-market orholding of 80% or more in liquid assets. Regulatorytightening has brought new fund launches to a halt, with thenumber of money market funds remaining relativelystagnant since the end of 20172015Money market funds guidelines: Established daily liquidityminimum of 5% and weeklyliquidity minimum of 10% Reduced the maximum fundleverage allowed to 20% Tightened limits on weightedaverage maturity and weightedaverage life2017Liquidity risk management formutual funds: Funds with higher investorconcentration are subject tohigher liquidity and shorterduration requirements New funds with single investorholding exceeding 50% of thefund are subject to valuation atmark-to-market or holding of80% or more in liquid assets Disclosure requirements andrisk provisions2018Redemption rules: Rules were introduced to capdaily redemptions to RMB10,000 for T 0 redemptionsSource: Bloomberg, CSRC, HSBC Global Asset Management, as of March 2019Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. HSBC accepts no liability for any failure to meet suchforecasts, projections or targets. For illustrative purposes only.7
HSBC’s RMB liquidity offers a strategic advantageRegulatory changes implemented in recent years in the RMB money market industry,as well as some of the challenges within the industry, point to a strategic advantagefor HSBC, which adopts a transparent, risk-focused, balanced approach.Transparency in managementBalanced approach is keyOne of the goals of the evolving regulatorylandscape is to provide investors with moreinformation on how funds operate and thepotential risks. Increased transparency willenable investors to make more informedchoices.There is a strategic advantage for strategiesthat are adopting a balanced approach ofaiming to preserve capital, manage risks, andprovide liquidity, along with focusing on yield.New regulations may lead to the closure ofsingle investor funds and establish a higherentry barrier. As the market evolves, investorswould learn to prioritise a balanced approachto managing money market funds in China.HSBC’s RMB liquidity strategy is well positionedfor the regulatory regime in China, with limits onweighted average maturities and weightedaverage lives which are shorter than therequirements under the regulatory changes.Sound risk management is criticalGlobal standards and ratings byinternational agenciesInstead of using yield as the only criterion, it iscrucial to take portfolio risk into consideration bymonitoring overall liquidity and credit risk, andensuring that clients’ capital is shielded frommarket downturns.Regulatory changes in China imply a strategicadvantage for funds that are rated byinternational agencies, abide by globalstandards, and continue to focus on theirstrategy in a dynamic market environment.Source: HSBC Global Asset Management, as of April 2019Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. HSBC accepts no liability for any failure to meet suchforecasts, projections or targets. For illustrative purposes only.8
Why HSBC as your liquidity partner?Robust riskmanagement A prudent, relativelylow-risk cashmanagementapproach Detailed, consideredset of investmentpolicies focused onmanaging ted teams A structured and High quality,methodical globallyconsistentinvestment processdedicatedinvestmentand supportresources Distinctive creditClient focused Dedicated regionalclient service teamsto provide timelysupport to clients A range of liquidity Investment andapproval and limitsetting processcredit teams locatedin 10 locationsworldwide with localmarket knowledgeinvestmentstrategies in multiplecurrenciesDisciplined investment process to fulfill clients’ objectivesObjectivesRisksHSBC solutionCapital preservation1CreditLiquidityLiquidityOutput yieldInterest rate In-house credit researchIssuer diversificationMaturity constraintsLaddered natural maturityLiability managementInterest rate strategyRelative valueNote 1: There is no guarantee that a stable net asset value will be maintained. Investors may not get back the amount originally invested. There is no guaranteethat the fund’s investment objectives, including performance, will be achieved.Source: HSBC Global Asset Management, data as of March 2019Any forecast, projection or target contained in this presentation is for information purposes only and is not guaranteed in any way. HSBC Global Asset Managementaccepts no liability for any failure to meet such forecasts, projections or targets. For illustrative purposes only.9
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China's money market funds: A large and evolving market p. 3 Themes for RMB liquidity -Demand for the RMB p. 4 Themes for RMB liquidity -Strong digital economy p. 5 Potential for further growth p. 6 Factors unique to RMB money market funds p. 7 Regulatory developments p. 8 HSBC's RMB liquidity offers a strategic advantage p. 9
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BIOGRAFÍA ACADÉMICA DE ALFREDO LÓPEZ AUSTIN Enero de 2020 I. DATOS PERSONALES Nacimiento: Ciudad Juárez, Estado de Chihuahua, México, 12 de marzo de 1936. Nacionalidad: mexicano. Estado civil: casado. Investigador emérito de la Universidad Nacional Autónoma de México, por acuerdo del Consejo Universitario, con fecha 21 de junio de 2000. Sistema Nacional de Investigadores. Nivel III .
