Cash & Liquidity Management
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Leveraging New Opportunities for Cash Investment in China

 

by Aidan Shevlin, Managing Director, Head of Asia Pacific Liquidity Fund Management, J.P. Morgan Asset Management

China remains one of the most dynamic and compelling markets for corporations globally, despite a recent softening in growth. As corporations either expand into China, or their operations in the country become more mature, investing surplus cash is becoming an increasingly important issue. As they face significant developments in the liberalisation of the interest rate environment, together with new regulations for money market funds (MMFs) and the emergence of new financial products, treasurers need to understand what opportunities may now exist to meet their investment objectives.

Increase in risk awareness

Most treasurers would typically prioritise security, liquidity and yield in that order when defining a cash investment strategy; however, the specific market dynamics in China have often subverted this ranking. In particular, there has been a widespread assumption that the Chinese government would not permit a bank to fail. As a result, investors have been less concerned about counterparty risk in China than in other jurisdictions. With the launch of a deposit protection scheme in April 2015, however, the government is now explicit about the amount of cash that would be protected in the event of bank collapse.

There are three major implications of this development. Firstly, treasurers now need to consider counterparty risk with the same degree of scrutiny as in every other market. Secondly, this may result in a cash outflow from some smaller banks, further increasing risk to these counterparties. Finally, the deposit protection scheme implies a potential for higher interest rates as banks try to attract cash from institutional investors, an important potential driver in interest rate liberalisation.