RMB house of the year: Crédit Agricole Corporate and Investment Bank

Asia Risk Awards 2020

Benchmark rates reform in China is critical for both Chinese domestic companies with US dollar debts and foreign investors looking to relocate to the country. Demand for renminbi hedging and financing solutions has intensified over the past 12 months as the financial markets embrace the secured overnight financing rate (SOFR) and foreign inflows into China hit new highs. 

Crédit Agricole Corporate and Investment Bank wins RMB house of the year for its innovative solutions and continuous expansion into the onshore Chinese market. The bank transacted the first onshore USD/CNY cross-currency swap using SOFR, priced an inaugural panda bond from a European systematically important financial institution, and continued to lead Chinese banks’ bonds sales in both onshore CNY and offshore CNH.

Being the first mover requires advanced pricing and structuring capability, and close relationships with clients.

One client says that this year Crédit Agricole has “[demonstrated] superb expertise in [the] CNY derivatives market and [proved] to be a reliable counterparty”, with the landmark SOFR transaction providing clear evidence of this.

The client adds that the French bank is well-placed to meet the growing demand for foreign exchange hedging in China’s capital markets.

Benchmark reform

Wing Cheung, Crédit Agricole

It was the Bank of China that was Crédit Agricole’s counterparty in its landmark USD/CNY cross-currency SOFR swap, which was transacted on April 21. The $10 million, one-year swap saw Bank of China receive compounded SOFR on the floating USD leg and pay a fixed rate of 0.48% on the CNY leg. The trade was confirmed on the China Foreign Exchange Trade System platform. 

Following the ground-breaking deal, Crédit Agricole is now in talks with other clients in China on contracts using the new reference rate to replace Libor.

“For Chinese banks right now, their focus is still SOFR, because if you look at their balance sheet, it still has very large USD liabilities compared with other currencies,” says Patrick Wu, head of emerging markets for Asia with Crédit Agricole CIB. “Therefore it is crucial for them to understand and prepare for Libor transition.” 

So far, Libor is still the most commonly used USD interest rate benchmark for Chinese firms. But it is widely expected that some Libor rates will not be published beyond 2021, once regulators stop compelling banks to submit quotes to the rate-setting panel. Once this happens, firms with Libor exposures will have to switch to an alternative reference rate.

While acceptance level of SOFR is still low among Chinese corporate and institutional clients, Crédit Agricole expects to execute more SOFR-based deals for firms in China as the Libor exit deadline approaches. 

Besides SOFR, Chinese clients – including banks and corporates – are also showing growing interests in transacting using other benchmarks, such as the sterling overnight index average (Sonia), it says. 

“USD liabilities are still the biggest part of Chinese clients’ [offshore] balance sheets, but we see the trend is changing, as Chinese banks and companies are diversifying their USD exposure amid growing US-China tensions,” says Wu. 

Wu says that, as a result, they are diversifying their cash account into another currencies, such as Hong Kong dollars.

“So on top of benchmark reform, we have done a lot of currency swaps for them,” he says.

As regulators around the world are pushing for benchmark reform of the Ibors, Chinese authorities are also working on a new rate regime that will change the benchmarks for almost all loans in the country. 

USD liabilities are still the biggest part on Chinese clients’ [offshore] balance sheets, but we see the trend is changing, as Chinese banks and companies are diversifying their USD exposure amid growing US-China tensions

Patrick Wu, Crédit Agricole

Last August, China’s loan prime rate – which has been around since 2013 – underwent significant reforms in August this year, with the number of contributors climbing from 10 banks to 18. For the first time, the new panel includes two foreign banks: Standard Chartered and Citi.

Since then the central bank has been pushing banks to price loans using this more market-based rate, rather than the rate set by the People’s Bank of China.

As China’s loan prime rate (LPR) has started gaining traction in the market, Crédit Agricole has been actively working with clients on how to use this new benchmark rate. 

Amid the global and local benchmark reforms, Crédit Agricole is expanding its presence in the onshore Chinese markets. It now provides hedging solutions between USD SOFR and the Shanghai interbank offered rate and USD SOFR and the LPR. It was able to complete transactions on both of these during the Covid-19 outbreak.

“Those are the areas in which we try really hard to develop and build capability,” says Wu. 

Straddling the offshore and onshore markets 

Being a rising RMB house means Crédit Agricole needs to connect the offshore and onshore worlds – reducing funding costs for Chinese clients and offering China market access to international investors.

This year’s record capital inflows into China were triggered by waves of rate cuts in the developed economies. Such inflows also provide opportunities for major banks as RMB FX hedging demands grow. 

Meanwhile, Chinese banks and companies continue to rely on major RMB houses to get funding from the offshore market. Chinese policy banks stand out in this regard, as Beijing uses them as a conduit for fiscal stimulus packages.

In 2019, Crédit Agricole, as international coordinator, helped China Development Bank with its 7.5 billion yuan ($1.1 billion) three-year green bond issuance.

Crédit Agricole’s global and varied investor base was an important factor in placing the bond issuance. Much of this was snapped up by central banks and sovereign wealth funds, which, according to the bank, tend to be less sensitive to price than some other investors when bonds are issued from high-rated policy banks.

According to the French bank, central bank investors turn to Crédit Agricole when they diversify their portfolios and seek to increases holdings of yuan-denominated assets, while sovereign wealth clients appreciate the banks onshore set-up and agile asset management framework.

At the end of last year, Amundi, the asset management arm of the Crédit Agricole Group, became the first foreign company to win approval from Chinese regulators to set up a majority-owned joint venture in the country. The wealth management entity will be 55% owned by Amundi and 45% owned by Bank of China Wealth Management.

Amundi is the largest European asset manager by assets under management. 

RMB financing 

Crédit Agricole has also been leveraging its structured loan platform to reduce funding costs for both onshore and offshore clients. 

“On the financing side, we also benefited from our competitive funding in Europe and lend to clients here in the greater China region,” says Wing Cheung, head of structuring and product development for Asia with Crédit Agricole CIB. “For instance, for corporate clients who have constant demands on RMB financing, both CNY onshore or CNH offshore, what we’ve done for them is to leverage our loan platform and help them to get access to funding in Europe, which is cheaper.” 

Cheung says that the solution was to embed a cross-currency swap into the loan product.

“This is not something every bank does or is able to do,” says Cheung.

The bank also demonstrated that it could finance clients and reduce costs for them even in volatile markets. In the first quarter amid the market meltdown and emerging makes sell-off, Crédit Agricole was able to secure cheap funding for a client in the energy sector by capturing the lowest point in the USD/CNH rate.

Moreover, growing US-China tensions could also mean that Chinese banks and state-owned enterprises will be more willing to work with a European bank such as Crédit Agricole, says Benjamin Lamberg, head of credit, Asia-Pacific at Crédit Agricole. 

Last year, Crédit Agricole was named as the best offshore China derivatives clearing house by Hong Kong Exchanges and Clearing.