Insight & Analysis

The Year of the Pig and beyond: game changers for the Greater China economy

Published: Feb 2019

Meng Kei Sou is Chief of Staff in the Regional CEO’s Office at Hong Kong-based Chida Estates Limited. His professional focus is on treasury, transaction and cash management, and strategic asset investment projects management. He recently presented to the regional executive committee of the company his thoughts on what the Year of the Pig holds in store. He shares his opinions here with Treasury Today.

“Against the backdrop of a synchronised global economic slowdown, escalating Sino-American trade and growing geopolitical conflicts, 2018 – the Year of the Dog – ended with a plethora of bombshell news that created a new wave of concerns on the economic vitality of the Greater China region.

Understandably, the bleak market sentiment was also due to China’s disappointing GDP growth figures and its earlier surprising contraction in M2 money supply (the ‘M’ series is a measure of money supply, from 0-4; typically, M2 is ‘broad’ money, including hard cash and short-term deposits plus assets that are highly liquid but not cash).”

The major game changers for the Year of the Pig are, I believe, as follows.

Firstly, PBOC’s potential regulatory relaxation will allow a more liberal and sophisticated cash pooling and in-house bank account structuring approach across different corporate entities. Similar to the experience of RMB internalisation ten years ago, PBOC is likely to issue a broad-based notification after the New Year, in order to initiate market discussion which would shape how the actual guidelines and qualifications are drafted. The (Chida Estates Limited) Corporate Treasury Steering Committee should engage bankers – both onshore and offshore – and external legal counsel, to correctly analyse the operating guidelines and the potential value added to the balance sheet, per various set-up scenarios.

Next is the Guangdong, Hong Kong, Macau Greater Bay Area (GBA) integration strategy. Promulgated by the PRC government last year, the GBA strategy aims at creating production and financial synergies through the establishment of major cooperation platforms amongst the 11 cities in the Pearl River area, where they share a similar social background but different comparative advantages. Underlying the GBA strategy is the integration and optimisation of human capital, physical and financial value chains that would speed up the transformation of Greater China’s economy into a world class technology and financial power house.

In terms of the yield curve and interest rate outlook, the earlier concerns on the successive US rate hikes, and asymmetric yield that put pressure on short duration liquidities, has already impacted North American banks, which saw their stock prices fall by an average of -8% since the half of 2018. Although the risk of further US rate hikes is somewhat reduced after Fed Chairman Powell’s recent dovish comments, uncertainty in the US and Greater China liquidity beta, and their macroeconomic performance, would pose a challenge to the asset liability management of banks and corporates.

We also still have Trump versus Xi over ‘global domination’. Given that the economic growth in the Greater China region has shown signs of weakness, the threat of an economic hard-landing increases, should the geopolitical disputes between the US and China further intensify.

Country credit ratings are a concern too. With comparable asset yields, the US’s AAA has absolute advantage over China’s A+ and Hong Kong’s AA+ S&P; country credit ratings. Downward revision is not entirely unlikely, and should always be considered in a company’s financial forecast, as well as its liquidity risk management planning.

To conclude, in the Year of the Pig, global and regional economies will be interlaced with exogenous and endogenous challenges and supportive policy changes. To succeed, we (Chida Estates Limited) must keep abreast with the development of the game-changers and reposition the treasury function as an integral part of corporate competitive strategy in the long run.”

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