by Travis Spence, Head of Global Liquidity Asia Pacific, and Dania Von Wangenheim, Client Advisor Global Liquidity Germany, J.P. Morgan Asset Management
China has become an attractive investment destination, with both individual investors and companies opening their portfolios to Asia’s largest economy. Companies doing business in China have often faced the challenge of where to put their excess cash, with the best option not necessarily offering a good investment. However, improvements in China’s credit rating and regulatory change have allowed Chinese money markets to develop substantially in recent years. Money market funds (MMFs) and separate accounts have been a product of this development, giving companies in China a broader and better choice of investments for their excess cash.
Traditional cash investments may no longer offer the best option
Companies doing business in China historically had few options to manage their liquidity compared to international markets. Bank deposits have for a long time been the most popular investment choice for excess currency in China. However, as the yields and tenors of bank deposits are regulated by the People’s Bank of China (PBoC), rates are not necessarily aligned to real market yields, and are often lower. The bank deposits also tend to be short-term investments, not suited to companies wanting long cash positions.
Banks in China also offer structured deposits to investors. Some structured deposits are attractive, given their low risk profile, and they generally provide a higher yield than PBoC deposits. However, they are only suitable for short-term investments as they pose liquidity risks as positions can be difficult to unwind before maturity (penalties may apply). Thorough credit analysis is also necessary as the universe is wide, and transparency is usually low.
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