SHANGHAI, China (Reuters) — China’s money market is an opaque, primitive place where fund flows are dominated by a few big state-run banks, and there’s not even a standard commonly accepted yield curve.
But for Raymond Hui, Head of Treasury for China at Societe Generale and one of Shanghai’s most experienced foreign bank traders, the market is starting to deliver on the promise that brought him here four years ago.
“The market is getting more open and transparent. Foreign banks’ involvement is larger and deeper,” says the Hong Kong native, who joined SG to set up its Shanghai dealing room in 2003.
“The price discovery system is now much more efficient because of the central bank’s new market making system — and this has made both foreign and Chinese banks more interested in fixed income, increasing bill and bond trading.”
Hui’s experience suggests millions of dollars spent by foreign banks to break into the Chinese money market, and years of frustration due to regulatory obstacles and the difficulty of training staff may finally be proving worthwhile.
When Hui arrived in Shanghai in 2003, he recalls, it was difficult even to get accurate price quotes from the market. Foreign banks, without knowledge of some of the biggest fund flows, were largely relegated to the sidelines.
“Chinese bank dealers all know each other, and debt trading information was only passed around their circle,” says Hui, who is in his 40s and worked for Japanese and European banks in Hong Kong before joining SG.
Even basic trades such as interest rate swaps, bond forward deals, bond short-selling and open-ended bond repurchase agreements did not exist.
Authorities have opened all of those areas over the past couple of years, though restrictions, red tape and lack of familiarity still keep volumes low in most.
A big development came in February when the central bank expanded its system of interbank market makers in bonds, letting the top 80 bond trading firms in China apply. Previously, only the 20 most active spot traders had this status.
This stimulated turnover and gave foreign banks a bigger role. Foreign banks held 0.9 percent of the 10.6 trillion yuan ($1.4 trillion) of outstanding Chinese bonds in July — a big rise from 0.4 percent at the end of 2006, official data shows.
Four years ago, there were only a couple of overseas bankers at foreign institutions in Shanghai focusing on treasury and derivatives trade, traders say.
That has risen to about 30 now. Including local staff, foreign banks’ treasury operations are estimated to employ several hundred people — a far cry from the thousands in London or New York but enough to make them a force in the market.
SG’s Shanghai treasury operation has expanded from one person when Hui arrived to eight, and he is about to add another sales person.
Key to growth is the way in which new money market products have increased interaction between Chinese and foreign banks as they leverage off each others’ strengths, Hui says.
Foreign banks are keen to make markets in new products because of their superior knowledge, gained from overseas, of the technical aspects. Chinese banks have the advantage of a big base of end users through huge domestic branch networks.
A growing two-way flow of staff between foreign and local banks, while a headache for personnel managers, is making trade easier by spreading both local knowledge and foreign expertise.
A bear market in bonds since early this year, as the central bank tightens monetary policy, may actually be helping develop the money market by making the old buy-and-hold strategy of Chinese banks less attractive.
Foreign banks have been able to jump in to make money from changing spreads along and between curves, and from arbitrage trades involving IRS and forex swap deals.
Hui expects the market to deepen further in the next few years as authorities introduce products such as bond futures, interest rate futures and forward rate agreements, which could smooth distortions in yield curves through arbitrage.
An expected surge in corporate bond issuance, after Beijing said this year the securities regulator would take over supervising that market, will be another opportunity.
But the biggest spur to foreign banks may be their incorporation within China, which lets them conduct yuan retail banking business and open more branches.
More than 10 foreign banks have incorporated locally this year and about a dozen more, including SG, are in the process of obtaining approval.
Though foreign banks will probably always have much smaller Chinese branch networks than the local giants, they will be able to expand their deposit bases and issue yuan bonds — obtaining funds for investment in the money market.
“I believe one of the factors that attracted us to take the local incorporation step is the ability to issue bonds,” Hui says, adding that SG has no concrete plan for a bond issue. E-mail to a friend