The China Banking Regulatory Commission's (CBRC) implementation of Basel III will foster greater complexity in the offshore renminbi (RMB) market.
In June the CBRC issued its Regulation Governing Capital of Commercial Banks. Its requirements are much higher than those specified under Basel II and Basel III.
Implementation of the regulation is expected to limit Chinese bank lending and increase ChinaCos' need to tap the bond market. The offshore RMB market will thereby play a greater role in the funding of domestic and Hong Kong banks' Tier 2 capital.
Speaking at IFLR's Asia Capital Markets Forum earlier today, Latham & Watkins' Bryant Edwards said Basel III's tougher capital requirements could prompt more complicated RMB structures to come to market.
"We've already seen keepwell structures develop, as well as other credit-enhancing products which are not subject to heavy government regulation," he said. "Given the history of the dim sum market, I expect more new and more complicated structures to come."
HSBC's Tracy Kung agreed. But she warned that, at present, there is a gap between demand from investors and supply of RMB products.
"Issuers have resistance in adopting new structures and we have to spend a lot of time in structuring the transactions," she said.
There are gaps too in terms of RMB bond tenors, she said.
"Most of the RMB bonds issued have tenor of two to three years and there are very few bond issuances with tenors beyond five years," she said. "However, some investors would prefer investing in RMB bonds with longer tenor."
Panelists agreed the Chinese government was actively addressing this by supporting the offshore market. China's Ministry of Finance is, at present, Hong Kong's biggest issuer of RMB bonds.
It's involvement, and in particular its emphasis on utilising different methods to develop the RMB bond market, helps create a sovereign yield curve, which in turn enables the market to price the bonds appropriately.
Certainly, market participants view RMB product innovation as key to Hong Kong maintaining its standing as a major offshore hub for the currency.
Edwards believed Hong Kong had to further develop new RMB futures to remain the source of action and interaction for RMB. Thanks in part to the huge volumes of trade finance between China, the US and UK, RMB futures have proven popular with 415 contracts traded on the day the product launched in Hong Kong.
But Kung said the development of offshore RMB market also links to development of the derivative market. She pointed out that in the current swap market, the liquidity of RMB against USD for tenor of more than five years was low.
For more of IFLR's banking reform coverage, see: http://www.iflr.com/Article/3107360/Lending/Banking-sector-reform-a-definitive-guide-to-the-latest-developments.htm
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