China Thwarts Morgan Stanley, UBS as It Opens Yuan Bond Market

When it comes to opening its $5.7 trillion bond market to global central banks, China is rolling out the red carpet. The world’s top underwriters are struggling to get in the back door.

Morgan Stanley set up a joint venture that’s helped manage 30.2 billion yuan ($4.9 billion) of note sales this year, a 0.8 percent market share that made it the No. 1 foreign arranger, Bloomberg-compiled data show. That ranked the New York-based investment bank 24th overall in China, well below its sixth place globally. UBS Group AG and Goldman Sachs Group Inc.’s Chinese joint ventures came in at 32nd and 37th respectively.

State-owned lenders dominate the scene and no foreign arranger has won a license to manage a bond issue regulated by the central bank — which oversaw 71 percent of corporate sales last year — since HSBC Holdings Plc became the first in 2011. While China is opening the doors wider to big international investors in a bid to make the yuan an International Monetary Fund reserve currency, the U.S. has said it must do more to open up its financial system to get IMF blessing.

“Domestic firms have grown and yet foreigners continue to be locked out,” said Fraser Howie, co-author of ‘Red Capitalism: The Fragile Financial Foundation of China’s Extraordinary Rise.’ “Foreign banks and securities companies have lots of reason to be angry about why the pace has been so slow.”

Rules Loosened

President Xi Jinping last month accelerated opening of the world’s third-biggest bond market. The People’s Bank of China on July 15 issued rules making it easier for foreign central banks, sovereign wealth funds and global financial organizations to invest in bonds traded on the interbank market.

Onshore notes held by overseas institutions jumped 84 percent in the 16 months through April, during which time China’s bond market expanded 26 percent, data from the central bank and China Central Depository & Clearing Co. show.

“China should speed up opening its bond market to underwriters because it’s seeking to attract foreign investors,” said Zhang Ming, the director of international investment research at the Chinese Academy of Social Sciences in Beijing. “Granting more access will help the market mature and won’t pose any risk to the financial system.”

Growth Lags

One reason foreign banks aren’t expanding underwriting activities faster could be insufficient risk appetite, said Jimmy Leung, PricewaterhouseCoopers LLP’s China banking and capital markets leader.

“Being new to China’s bond underwriting market, foreign financial institutions are very cautious about investment and the volume of businesses in China,” Leung said.

Foreign banks’ underwriting volumes have increased as China’s bond market ballooned. UBS, the top foreign underwriter from 2010 to 2014, arranged 42.8 billion yuan of note sales last year, compared with 25.7 billion yuan four years ago.

That lagged domestic rivals. Industrial & Commercial Bank of China Ltd., the top domestic underwriter, managed 414.2 billion yuan of offerings in 2014, more than double 2010’s 194 billion yuan.

‘Be A Pioneer’

“Across the entire financial system, foreign firms have been largely shut out of the growth of the Chinese market, to the detriment of China,” Howie said. “China does suffer from this because it means lack of good competition.”

HSBC is the only foreign underwriter that can underwrite bonds regulated by the central bank, but its license doesn’t give it the right to be a lead arranger of notes. Foreign brokerages’ joint ventures can underwrite bonds regulated by the other two regulators, the China Securities Regulatory Commission and the National Development and Reform Commission.

“HSBC continues to leverage its onshore and offshore expertise to support China’s financial markets, including in debt underwriting, by deepening and widening market activity while facilitating investor access to onshore products,” Ryan Song, HSBC’s head of markets for China, said.

Morgan Stanley Huaxin Securities Co.’s Shanghai-based chief executive Bao Yi said the firm’s focus is to “further connect on and offshore bond markets and clients, be a pioneer of new domestic products” and improve its execution capabilities.

JPMorgan Chase & Co. and Citigroup Inc.’s local joint ventures declined to comment, as did officials at Goldman Sachs, Credit Suisse Group AG and Deutsche Bank AG. A press official at the National Association of Financial Market Institutional Investors declined to comment on foreign banks’ underwriting licenses. NAFMII is a unit of the central bank.

U.S. Treasury Secretary Jacob J. Lew said June 24 that China has committed to financial reforms, including opening capital markets and expanding access for foreign finance firms.

The numbers have yet to bear that out.

“In the 1990’s China was a much smaller economy with less resilience, and you could argue for the slow pace of opening,” said Howie. “Now it’s the world’s second-largest economy with some of the largest companies in the world. It’s frankly inexcusable how slow the whole opening is going.”