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Treasury & Capital Markets
Why Chinese corporates should make less aggressive investments
Chinese corporates should exhibit greater conservatism, less risk in their treasury investments
Derrick Hong 1 Apr 2018

As Chinese corporates continue to grow at a fast pace and expand abroad, it becomes more important for them to be less aggressive with their treasury investments to curb unnecessary risk taking.

Instead of chasing after higher return, higher risk investments, Kheng Leong Cheah, managing director, Asia-Pacific and head of global liquidity sales at J.P. Morgan Asset Management, advises Chinese CFOs and treasurers to particularly keep an eye on the short-term liquidity and security.

“Corporates should set appropriate benchmarks for their treasury investments to support the liquidity needs and risk appetite of the corporate according to their investment policies,” says Cheah in an interview with The Asset.“Setting investment return benchmarks that are too high from a market perspective might result in unnecessary risk-taking behaviour.”

As one of the most significant groups of clients to the banks, Chinese corporates are the fastest growing group joining the Fortune 500 list. In 2017, 115 Fortune 500 companies were from China, up from 98 in 2016.

“Chinese corporates are growing at a fast pace. Corporates are not only accumulating more cash at accelerating speed, they are also venturing offshore going into unfamiliar territory where investment options are very different from what they are used to onshore in China,” says Cheah. Because of this Cheah believes it would be prudent for some of China’s large corporates to place their cash in more than one counterparty bank. “For a large corporate placing a large amount of cash in one counterparty bank is not only risky because of counterparty concentration risk, it might not be feasible,” he says.

Until recently, liquidity management has traditionally been the most important element of corporate treasury management. But as their roles evolve, treasurers have been participating more in companies’ business strategy execution. They need to have an oversight of a company’s working capital cycle. At the same time, they are expected to achieve high risk adjusted return on treasury investments.

As a result, it has become a practice for some treasurers in China to venture into high-risk investments. In their bond investments, for example, treasurers will add leverage to obtain higher returns. There had been reports too of corporates obtaining loans to invest in initial public offering (IPO) shares of Chinese firms that end up performing poorly after their listing.

As Chinese corporates internationalize, the style of liquidity management being adopted by treasury teams should also evolve. Aidan Shevlin, managing director and head of Asian liquidity fund management at J.P. Morgan Asset Management, believes changing regulations and Chinese corporates’ exposure to best global practices will drive this change.

Treasurers have traditionally considered money market funds as well as structured products as safe investments. But a new rule that removes implicit guarantees for wealth management products could make treasurers more cautious about investing in them. Moreover, China cut the duration for money market funds to 90 days from 180, in a sign that the government is concerned about liquidity risks and will tighten rules for the wealth management sector if necessary.

“The regulators are closely monitoring Western regulatory developments while companies in China are now operating more globally. Both these trends imply a movement towards global best practice,” says Shevlin.

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