IFLR Asia Capital Markets Forum 2017: key takeaways

Author: Karry Lai | Published: 29 Nov 2017
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Keynote speech: Romnesh Lamba, co-head of market development, HKEX

  • increasing connection between Hong Kong and China through Stock and Bond Connect, and the goal to expand asset classes in Hong Kong through fixed income, currency and commodity (FICC);
  • China has $36 trillion in bank assets, $8.6 trillion in equities, $10.9 trillion in bonds, in contrast to the US where bank assets, equities and bonds are in more equal quantities - equities and bonds expected to continue to grow faster than banking system in China;
  • foreign participation in bond market remains small, at only 2%;
  • China onshore bonds included in newly-created indices such as Bloomberg-Barclays fixed income indices, like MSCI for equities;
  • Southbound Bond Connect to follow in due course.

Regional equity capital market updates

  • Securities and Futures Commission of Hong Kong (SFC) is using powers that it already has but these powers just haven’t been exercised before;
  • SFC using letter of mindedness (LoM) before letter of rejection for listings;
  • the exchange needs to provide a clear picture to market on suitability, very subjective, have to preserve flexibility but give certainty;
  • speed, access to market and transparency are the main deciding factors for companies choosing listing venue;
  • US’ approach is as long as you tell full story to investors, they have the information to make decisions and can rely on class action lawsuits, SEC is in driver’s seat and exchanges play a subsidiary role with no role in reviewing IPO application processes which helps to streamline;
  • US companies have greater diversity in shareholder base whereas companies in Hong Kong are more family owned which is a factor to consider when deciding on weighted voting rights;
  • need to accommodate for new economy and pre-profit companies on exchanges;
  • next big wave is biotech and companies are desperate for capital in China, failure to figure out how to accommodate for these companies means lost opportunities.

Opportunities and challenges in high yield

  • twice as much volume in deals in 2017 compared to 2016, with National Development and Reform Commission (NDRC) approvals for offshore debt issuance came all at once in October;
  • frontier sovereigns coming from countries such as Sri Lanka, Mongolia, Maldives, driven by low interest rates, rise in commodity prices and need to refinance existing debt;
  • PRC investment banks interested in One Belt One Road (OBOR) projects, soft diplomacy and goodwill projects, can internationalise and expand portfolio, not necessarily driven by returns;
  • increase in 364-day bonds in China because of loophole in law, no need for bonds of less than a year to register with NDRC, but NDRC may close loophole;
  • five deals pulled in Indonesia this year, anticipation of very good quality issues, increasing environmental disclosure and compliance from resource driven issuers;
  • for 2018, can expect increase in volatility, more first time issuers, more companies testing market, diversity in issuers, green bonds, bonds targeting specific moral views (gender equality bond in Australia for example). 

Distressed debt and restructuring in Asia

  • banks more cautious about lending, especially in real estate and commodities;
  • new Bankruptcy Code in India creating opportunities, nine month liquidation if no workout, force decision and doesn’t allow time to run, commercial banks’ asked to file bankruptcies has changed landscape;
  • foreign investment into asset reconstruction companies in India;
  • China has extended model of asset management companies (AMC) to provincial level, need to be in market and partner with AMCs to source deals;
  • China looking for foreign money to bring in more capital to local bond market;
  • China heavily influenced by US while India follow UK model for bankruptcy.

China-Hong Kong Bond Connect programme and beyond

  • Bond Connect approval system easy, certainty with 10-12 working days for approval, international investors can trade electronically on China bond market using Tradeweb;
  • more Chinese issuers in green bonds, International Capital Market Association (ICMA) guidelines, 75% of global issuance in 2016, Bond Connect can facilitate;
  • issue of beneficial ownership, need for investor identification for Stock Connect;
  • investor fatigue in different channels of China Interbank Bond Market (CIBM), qualified foreign institutional investors (QIFII), risks with access points being different with compliance and tax issues different;
  • regulatory restriction with CNY allowed to be used only for Bond Connect purpose, can’t move CNY around, banks required to report suspicious activity on arbitrage between CNY and CNH, can’t play market not intended by regulator;
  • Southbound Bond Connect will allow Chinese onshore investors to tap offshore;
  • potential of IPO and ETF Connect, can entice more IPOs and ETF issuers to Hong Kong for Chinese investors to access.

OBOR and RMB Internationalisation efforts: opportunities and challenges

  • OBOR involves over 60 countries, 31% of global GDP, estimated to account for 80% of GDP by 2050;
  • at the end of the day, bankability of projects is key: Hong Kong big opportunity to facilitate funding through initiatives such as establishment of Infrastructure Financing Facilitation Office, cross-border lending platform for foreign banks;
  • Russia largest recipient of funding, Russia has started accepted RMB, followed by Pakistan, mostly by China;
  • how much financing can be done in RMB is key, Hong Kong platform for dollar financing. 

Best practices in KYC, AML and regtech

  • regtech to help get data automatically, streamlines reporting and allows less room for human error in handling investigations;
  • helps with accuracy, digging information in emails;
  • often difficult for technology to identify and remediate problem, doesn’t necessarily speed up process with handling problems such as different naming conventions ex: Korean/Chinese names, can create false alarms;
  • need to cater to company headquarters but can’t breach local laws. 

A look into regulatory enforcement in China

  • cooperation between CSRC and SFC on manipulative trading but Hong Kong has no jurisdictional right, working to tackle problem, unanswered questions of how CSRC can help to serve notice for suspects and witnesses to appear in front of SFC investigations, whether interview record is admissible in Hong Kong court;
  • after 19th Party Congress, the 'financial super regulator,' the Financial Stability and Development Committee, began operation, areas of concern in shadow banking, asset management, internet finance, initial coin offerings, peer to peer lending;
  • CSRC requires real names for account opening, can see who is trading, Hong Kong just sees broker, takes time to find out who is behind and for meaningful information to be revealed;
  • NDRC naming and shaming companies that fail to register for offshore debt issuances, five bond issuances of 364 days given risk warning, if happens again, put in system and would affect credibility in future;
  • private vs. public bonds-private ones no public record, would only know if a dispute arises, public ones are easy for NDRC to find out, does check prospectuses, especially on tax issues.


 


 

 

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