China bulls and bears: embrace the inevitable

MSCI’s decision on June 21 to include A-shares in its Emerging Markets Index has, once again, unleashed furious debate between those seeing it as another case of global institutions bending the rules to appease China and those always viewing the China glass as half full. But neither view has much to offer in explaining the Mainland’s growing integration in global financial markets.

  • By Paolo Danese
  • 23 Jun 2017
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It’s the same playbook, just with a different name. In October 2016, the IMF’s board decided that the RMB met the technical criteria to become a special drawing rights (SDR) currency. The currency got an 11% weighting in the basket, joining the company of the dollar, euro, yen and pound.

The IMF’s reasoning was based on the strictly technical review of the SDR criteria — specifically that the currency should belong to a country with substantial exports and that its currency should be widely used beyond the domestic market. For the IMF, the data showed that the RMB ticked these two boxes.

For China bulls, the SDR entry was a great victory for the renminbi internationalisation agenda, giving it a stamp of reserve currency-level worthiness.

For others in the market, however, the decision had more sinister overtones. They argued that the IMF had essentially chosen a currency that was not fully floating. A rising one for sure, but far from a currency nearly as popular as the dollar or any of the others previously in the IMF basket.

Now fast forward to MSCI’s decision this week to make A-shares a part of its EM index, which has some $1.6tr in assets benchmarked to it. Just like with the IMF, giving the A-shares a mere 0.73% weighting in the index does not, at least on the face of it, smell of appeasement.

Yet, unsurprisingly, some commentators have been quick to point out that China has not really made enough effort to deserve such an inclusion and that MSCI, in short, was making a mistake by letting global investors anywhere near risky A-shares, which have had a patchy and volatile performance history.

On the flip side, and equally unsurprising, are the permabulls. China scored another major victory, they said, crowning a decade-plus of reform efforts.

The emotional factor

It is tempting to fall into either camp. True, the impetus and momentum of Chinese reforms can make your head spin — giving ground to the China watchers with rose-tinted glasses.

But, just as much, the list of to-dos for Chinese authorities is near infinite and the shortcomings of the still largely government-controlled marketplace, whether for steel production or stocks, are glaring.

China, it seems, has the ability to produce ever growing armies of fans and haters at every step it takes towards full integration in the global economic system.

But the funny thing is, there is really no reason to be in either camp. Cheering or hating will not change the fact that China’s rise as an economic and political power, and its consequently greater role globally, is inevitable.

That inevitability should invite calm and reflection about the fine print of how the changes take place, which is where global experts should really weigh in. Instead, more often than not, the media and market commentators are more interested in going straight for one of two things: that either everything (China-wise) is awesome or everything is a disaster that threatens to unleash chaos on the world.

It would instead be better and more productive to take these steps by the IMF and MSCI for exactly what they are — steps.

By leaving the emotional factor at the door, you can see that they are neither unconditional victories for China nor plain defeats for the rules of the global financial markets. They are rather opportunities that can be leveraged or missed. Opportunities for China to become further involved in the institutions that it joins, in a process that, also inevitably, will alter the course of its policy agenda. And they are opportunities for the rest of the world to get its hands dirty and get to know China up and close, something that is still sorely lacking, especially outside of Asia.

The MSCI is a perfect example of that, with investors and money managers worldwide now having to slowly build the research and knowledge base required to accomplish the transition to the new MSCI EM index that becomes effective in August 2018. Hard to see a threat in that, given the tiny weight given to Chinese stocks, but much more reasonable to accept the inevitability of that process and act accordingly.

China is on the map now and it will not go away. What the market needs to do is deal with it constructively.

  • By Paolo Danese
  • 23 Jun 2017

Panda Bonds league table

Rank Arranger Share % by Volume
1 Bank of China (BOC) 23.56
2 Industrial and Commercial Bank of China (ICBC) 16.09
3 China Merchants Securities Co 11.38
4 Agricultural Bank of China (ABC) 6.90
5 HSBC 5.75

Panda Bond Database

Pricing Date Issuer Country Size Rmb (m)
1 03-Sep-19 China Power International Development China 2,000
2 02-Sep-19 China Power International Development China 500
3 22-Aug-19 Mengniu Dairy China 1,000
4 07-Aug-19 Daimler Germany 5,000
5 31-Jul-19 Cassa Depositi e Prestiti SpA Italy 1,000

Offshore RMB Bond Top Bookrunners

Rank Bookrunner Share % by Volume
1 Standard Chartered Bank 32.50
2 Credit Agricole 6.34
2 HSBC 6.34
4 Bank of China (Hong Kong) (BOCHK) 6.22
4 Bank of Communications Hong Kong Branch (BOCOM HK) 6.22

Latest Offshore RMB Bonds

Pricing Date Issuer Country Size Rmb (m)
1 16-Jul-19 CIFI Holdings China 1,600
2 22-May-19 Agricultural Development Bank of China (ADBC) China 3,000
3 16-Apr-19 ICBC Singapore Branch China 1,000
4 10-Apr-19 Bank of China Macau Branch (BOC Macau) China 4,500
5 15-Mar-19 Bank of Communications Hong Kong Branch (BOCOM HK) China 2,500