Five Things Kiwi Investors Need to Know
Five Things Kiwi Investors Need to Know About Entering the Newly Liberalised Chinese Interbank Bond Market by Karen Hou, Executive Director And General Manager, Industrial & Commercial Bank of China (New Zealand)
Amid all the conversation this year about fluctuations in the Chinese economy, what has gone largely uncommented is what the Financial Times last month called a quiet ‘revolution in liberalisation’. It was rightly noted that “July was a landmark month, heralding the freeing up of access to China’s interbank bond market for overseas central banks, supranational institutions and sovereign wealth funds. A set of new regulations scrapped approval and quota requirements.”
Chinese liberalisation is emerging in many other ways. The Trilateral Trade Pact (TTP), also known as CJK (China-Japan-Korea), which was first mooted in 2011, now has the potential to cover 20% of the world’s trade. China has also driven RCEP, the Regional Comprehensive Economic Partnership, a free trade agreement negotiation among 16 countries, including New Zealand.
As China’s economy assertively transitions from an infrastructure- and manufacturing-based model to a services- and consumer-based economy, more and more doors are opening to foreign investors. Much of the talk has been about Chinese investment in other markets, including land purchase, but China’s economic leaders want more money to flow in the other direction as well. The interbank bond market is an opportunity these leaders are keen to promote – as of the third quarter of 2015, the Chinese bond market is the third largest globally, worth about 39.55 trillion RMB (USD6.21 trillion).
However, foreign investment in China has been impeded by all sorts of hindrances and perceptions, including good old-fashioned fear of the unknown. What must would-be investors know before jumping in?
1. Avoid going straight to the source. The New Zealand and Chinese economies and preferred ways of doing business are wildly different – that’s just how it is. Over time, we’ll adapt to each other’s ways and probably adopt more synergies and similarities, but for now, look for informed Chinese people on the ground in New Zealand who have the skills and contacts to introduce you to the Chinese bond market. All the major Australasian banks have Chinese services, and Chinese banks such as mine are either planning to enter the New Zealand market or are already here. Past investors have been burned by going through the wrong channels, so it’s better to seek out China-connected entities with a firm base in New Zealand who can serve as both adviser and conduit.
2. The rules of investment remain the same. It sounds simple, but when the opportunity is big, some investors are inclined to forget basic rules. Don’t invest more than you can afford to lose, and approach any Chinese bond investment as part of a diversified portfolio. China’s economy is unusual not only for its size but its relative stability – any Chinese banker will be quick to tell you that the GFC and previous crises were not China-based – but nothing is foolproof. View a potential investment in China as you would any other, and do your homework.
3. Tune out the noise. There is a lot of conversation about the state of the Chinese bond market and no shortage of predictions about where it will go. Further to the conclusion of the point above, apply your own filter, and those of your trusted advisers, and do your own due diligence. Whatever a prospective investment, you can find commentary that supports or opposes it. Tune out the noise around Chinese bonds and make your own determination, based on your own criteria, as to whether they’re a feasible investment option for you.
4. Ask questions. The Chinese way of doing business involves a lot of meetings and and positive talk. If you meet with Chinese bond market advisers, be clear about what you need to know before investing. Any financial adviser will naturally speak favourably of their market, so don’t hold back in quizzing them and requesting evidence of what is being stated or promised.
5. Know what to expect from a service provider. The very least a New Zealand investor should demand from a provider of access into the Chinese market is current advice on all market regulations and rules and assistance with all pre-trading works, including cash account and bond account establishment. In the trading process, investors should receive a full service, including quotation, trading, settlement and cash clearing, and daily market information and hot issues analysis reports that keep investors apprised of the state of the market. A good services provider should act as a bridge and window between the New Zealand client base and the Chinese financial market and economy. Private investors should make initial inquiries through their institutional investment advisor.
Karen Hou is the New Zealand-based executive director and general manager of Industrial & Commercial Bank of China (ICBC), which was established in New Zealand in 2013.