China inflows: be careful what you wish for

Foreign investors are hungry to get access to China’s capital markets, and the small moves to allow investor inflows are nowhere near enough to sate their appetite. But investor protection in the country is not strong enough, and foreign investors should take great care before investing in the mainland market.

  • 08 May 2012
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The Chinese government has received a lot of attention for starting to liberalise capital outflows from the country — part of its plan to help local companies by promoting the use of the renminbi offshore — but it still has a lot of work to do on inflows.

There are some signs the government is moving in the right direction. Regulators lifted the quota for qualified foreign institutional investors from $30bn to $80bn last month — although less than $25bn had been allocated at this point — as well as increasing the amount of offshore renminbi that the Hong Kong subsidiaries of Chinese companies could remit to the mainland to invest in the local market.

But the full liberalisation of the capital market is still some time away. Most analysts do not expect the currency to be liberalised until 2015, and foreign investors are unlikely to be allowed into China en masse before that point. Even the World Bank only got permission to invest in the onshore renminbi market last month, despite its strong ties with the government. (International Finance Corp, an arm of the World Bank, was allowed to become the first foreign issuer of renminbi bonds in October 2005.)

The government is slowly moving in the direction investors want, and foreign investors are understandably anxious to get access to the country. But they should walk into the country’s capital markets with their eyes wide open. China may be an exciting growth economy and it may give impressive returns (especially for those who already invest in the comparatively tight dim sum bond market), but investor protections in the country are another story altogether.

China gets a mark of five out of 10 on the World Bank’s investor protection scale, which specifically refers to protections for shareholders, rather than bond investors.

China’s score is, unsurprisingly, nowhere near the scores posted by Hong Kong and Singapore, which each get more than nine out of 10. But that is an unfair comparison: after all, the two Asian financial hubs are more investor friendly than both the UK and the US, which have scores of 8.0 and 8.3, respectively. It is when you compare China to other emerging market nations that it really looks poor.

The country, in fact, more closely mirrors France than it does other emerging market countries. Brazil, India, Russia and South Africa — the other members of the BRICS grouping of rising economies — all have a degree of balance when it comes to protecting investors, although Russia’s protections still leave a lot to be desired.

France, on the other hand, is on a similar plane to China when it comes to investor protection: extreme disclosure rules, backed by almost no liability at the director level — and a difficult environment for shareholders to sue companies for misconduct. In other words, we have to tell you what we’re doing, but if you don’t like it, there’s not much you can do about it.

But while France may have shoddy investor protection, it does not have China's closed-shop political system where ministers are said to appoint many of the chief executives of the biggest state-owned companies. The combination of the two is a recipe for disaster.

In average terms, China does not look bad compared to East Asia and the Pacific Islands (see table). But its average is driven up by disclosure rules, not by any attempt to protect investors in a real recovery situation.

Foreign investors have already got used to taking a certain amount of recovery risk with Chinese credits. The deals they buy in the international bond market are usually sold by offshore subsidiaries which have little or no control over the onshore assets, effectively subordinating offshore creditors to onshore ones.

But they need to realise another truth: just because they are now getting direct access to companies, that doesn’t mean they are safe.

  • 08 May 2012

Bookrunners of International Emerging Market DCM

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • 17 Oct 2016
1 Citi 38,857.97 184 9.39%
2 HSBC 38,447.58 227 9.29%
3 JPMorgan 34,744.34 142 8.40%
4 Bank of America Merrill Lynch 28,556.15 119 6.90%
5 Deutsche Bank 18,270.77 72 4.42%

Bookrunners of LatAm Emerging Market DCM

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • 18 Oct 2016
1 JPMorgan 13,268.07 33 6.30%
2 Bank of America Merrill Lynch 11,627.56 29 5.52%
3 Citi 11,610.06 30 5.52%
4 HSBC 10,091.34 29 4.79%
5 Santander 9,533.17 25 4.53%

Bookrunners of CEEMEA International Bonds

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • 18 Oct 2016
1 Citi 13,617.40 57 11.05%
2 JPMorgan 12,607.77 55 10.23%
3 HSBC 9,327.72 50 7.57%
4 Barclays 8,643.78 30 7.02%
5 Bank of America Merrill Lynch 6,561.15 18 5.32%

EMEA M&A Revenue

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • 02 May 2016
1 JPMorgan 195.08 50 10.55%
2 Goldman Sachs 162.26 37 8.77%
3 Morgan Stanley 141.22 46 7.64%
4 Bank of America Merrill Lynch 114.20 33 6.18%
5 Citi 95.36 35 5.16%

Bookrunners of Central and Eastern Europe: Loans

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • 18 Oct 2016
1 UniCredit 3,966.12 27 13.01%
2 SG Corporate & Investment Banking 2,805.90 16 9.20%
3 ING 2,549.27 20 8.36%
4 Citi 2,526.98 15 8.29%
5 HSBC 1,663.71 16 5.46%

Bookrunners of India DCM

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • 19 Oct 2016
1 AXIS Bank 5,944.45 123 18.53%
2 HDFC Bank 3,792.05 100 11.82%
3 Trust Investment Advisors 3,390.86 145 10.57%
4 Standard Chartered Bank 2,299.63 31 7.17%
5 ICICI Bank 1,894.86 51 5.91%