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
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.
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
dim sum market, I
expect more new and more complicated structures to
Tracy Kung agreed. But she warned that, at present, there is a
gap between demand from investors and supply of RMB
"Issuers have resistance in
adopting new structures and we have to spend a lot of time in
structuring the transactions," she said.
are gaps too in terms of RMB bond tenors, she said.
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.
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
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.
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
What ICBC's approval means
for China-US banking http://www.iflr.com/Article/3029944/What-ICBCs-approval-means-for-China-US-banking.html
Why China needs an expanded
bond market, now http://www.iflr.com/Article/3093863/Why-China-needs-an-expanded-bond-market-now.html
What NAFMII's asset-backed
MTNs mean for securitisation in China
Why Basel III is bad for