RMB house of the year: Crédit Agricole CIB

Asia Risk Awards 2024

Wendy Zhu, Crédit Agricole CIB

For Chinese institutions and foreign investors into China alike, greater market acceptance of renminbi assets as collateral has long been on the wish list. Chinese banks are seeking this to help them access funding in foreign currencies through cross-border transactions; foreign investors seek it because they would like to start putting their growing portfolios of RMB assets to work in repo or as margin on their cleared derivatives trades.

On several fronts, Crédit Agricole Corporate and Investment Bank (CIB) has been at the forefront of new developments in RMB collateral acceptance over the past year.

Leveraging its leading position in RMB bonds, the French lender pioneered the first Japanese yen cross-currency repo transaction for a Chinese bank involving a non-Chinese bank using CNY bonds as collateral for Japanese yen financing. That first repo trade was followed by others. Earlier this year, the bank also became the first Hong Kong Exchange OTC Clear (HKEX OTCC) member to post Chinese government bonds (CGBs) as non-cash collateral for initial margin.

Patrick Wu, Crédit Agricole CIB

“We are a pioneer of cross-border financing, where it’s mainly in the repo format by using China government bonds,” says Patrick Wu, Crédit Agricole CIB’s head of macro and co-head of trading for Asia-Pacific and the Middle East. “We’ve become a net lender of a number of hard currencies, including the US dollar, yen, euro and Aussie dollar.”

As Chinese banks expand their footprints overseas, access to financing in foreign currencies has become a critical need. Although the country has been working to gradually open up its capital account restrictions remain, which mean it is not always easy for banks to move RMB funds offshore and swap into the currencies they require for their overseas operations.  

“So, the question is, how do we help them use their onshore assets – in particular, CGB or any other quasi-sovereign instruments – to raise G3 or EM currency in the offshore market?” says Wing Cheung, head of structuring and product development for Asia.

Wing Cheung, Crédit Agricole CIB

The China Foreign Exchange Trade System (CFETS) and China Central Depository & Clearing first allowed tri-party cross-currency repo in July 2021, and it was expanded to include bilateral cross-currency repo in April 2022. Crédit Agricole CIB snapped at the opportunity and, in November 2023, had become the first foreign bank to trade a Japanese yen cross-currency repo that was backed by China government bonds issued onshore.

Other international banks have since followed in Crédit Agricole CIB’s wake into this new cross-border repo trade with Chinese clients.

“We started early, and we will establish our reputation and the market shares in this market. So as a client, they know they can come to us and have competitive pricing,” says Leon Lam, head of global markets for Hong Kong and head of structuring and solutions sales for Asia-Pacific and the Middle East.

The trade is booked under the National Association of Financial Market Institutional Investors (NAFMII) repo agreement at the CFETS system with a maximum tenure of one year. The onshore Chinese institution is the repo buyer, selling CGBs to Crédit Agricole CIB and receiving yen in return. The Chinese institution then repurchases the CGBs when the contract expires.

After the onshore institutions receive yen, they can further swap yen to USD onshore if USD is needed, which will help them enjoy better pricing compared with directly swapping renminbi to USD using the CFETS’ USD Interbank Offer Rate.

Leon Lam, Crédit Agricole CIB

“By doing what we’re doing right now, I think they can effectively lower [institutions’ funding costs] or make the foreign currency supply in the onshore [market] more stable,” Wu says.

One onshore counterparty praised the bank for being the first foreign bank to break ground in the new market for cross-currency repos and, by doing so, providing domestic institutions such as itself with access to new sources of foreign currency funding.

“Crédit Agricole CIB provided good pricing for the product and accepted a wide range of RMB collaterals. The bank is contributing to the infrastructure of the internationalisation of CGBs and broadening foreign currency funding channels for domestic institutions,” the client said.

In addition to the use of RMB bonds for cross-border repo collateral, the bank is also leading in the drive for greater acceptance of these assets as margin for cleared derivatives trades.

In March, Crédit Agricole CIB became the first bank to post offshore Chinese government bonds to HKEX’s OTCC as initial margin to replace the Hong Kong dollar cash the bank posted previously. The use of CGBs for initial margin instead of cash will help lower institutions’ clearing costs allowing them to trade more and, in a virtuous circle, should also translate into stronger offshore demand for CGBs.

“We have been working with the Hong Kong Exchange for a long time, many months, on this because nowadays interest rates are high, and the collateral costs are also high,” says John Luk, head of emerging markets trading for Greater China for the bank, based in Hong Kong. “And to be able to use our own assets as initial margin, we will reduce our own funding cost to assess the market. This will help the whole market as well to reduce the overall transaction cost.”

The next step, Luk says, is to continue working with HKEX to allow more CGB collateral to be posted since only a limited amount is permitted at the moment.

Two-way flow facilitator

Besides helping its onshore clients with cross-currency financing, Crédit Agricole CIB is also helping its clients navigate the divergence between China and US rates.

While the US Federal Reserve has held interest rates slightly above 5% during the past year, China’s interest rate benchmark, the seven-day repo, has dropped below 2% as onshore policy-makers struggle to stimulate the economy and achieve a growth target of 5% in 2024.

John Luk, Crédit Agricole CIB

This macro trend has had two big impacts for the Crédit Agricole CIB’s clients onshore and offshore. First, it has led a growing number of onshore firms to seek out yield-enhancement opportunities in Hong Kong’s offshore renminbi market. Second, it has generated a surge in interest among offshore firms in RMB as a funding currency.

“There is a lot of investment demand generated from this as Chinese investors continue to diversify their portfolios,” Luk says. “For us, as an international bank, we provide these assets with higher yields for the Chinese investors to invest, and many of these are done through the Southbound Bond Connect.”

In the second half of 2023 and the first quarter of 2024, Crédit Agricole CIB issued more than CNH5 billion of structured notes as well as bullet notes through the Southbound Bond Connect, indicating the bank’s commitment to the cross-border investment scheme.

“For investors onshore in China, including asset managers, security houses, banks and corporates, when they invest overseas we provide channels, including Southbound Bond Connect, which they can [use to] do notes, no matter if it’s our own issuance, or third-party issuance,” says Wendy Zhu, head of global markets for China.

The bank also provides OTC solutions such as total return swaps (TRS) for onshore clients, which could be done under International Swaps and Derivatives Association Master Agreement or the NAFMII framework.

George Thimont, Crédit Agricole CIB

One of the benefits of trading in a TRS format is that it doesn’t consume investors’ quota under the Qualified Domestic Institutional Investor scheme, a popular channel through which domestic firms can invest in foreign securities subject to certain limits.

Meanwhile, on the funding side, Crédit Agricole CIB has also been one of the most active issuers and underwriters in China’s booming Panda Bond market over the past year. Amid plummeting interest rates, sales of panda bonds, RMB-denominated debt issued by offshore companies in China’s onshore market, is booming. Data from Shanghai Clearing House shows Panda Bonds worth 129.5 billion yuan were issued for the first seven months of 2024, compared with 85 billion yuan issued during the same period last year.

Crédit Agricole CIB has been one of the top issuers, as well as a key intermediary between other issuers and investors in its role as an underwriter in the market.

From May 2023 to April 2024, the bank underwrote more than 10 billion yuan’s worth of Panda Bonds, of which Crédit Agricole SA itself issued over 4.6 billion yuan.

“We are actively promoting Panda Bonds in the rest of Asia and Europe, and bringing increasing numbers of issuers to China to access the Panda Bond market. We are also advising on hedging of the funds offshore where appropriate as that can be a key consideration for these borrowers,” says George Thimont, head of Asia-Pacific ESG syndicate and head of Asia ex-Japan Syndicate.