Tianfeng Securities: China’s internationalization will survive global challenges

The internationalization of the Chinese capital markets will remain a long-term trend despite the current period of upheaval in global capital flows, according to Zhai Chenxi, Executive Vice President of Tianfeng Securities.

Zhai, who is an architect of Tianfeng Securities’ overseas strategy, said that dramatic changes to the geopolitical landscape have made investors cautious in the near term. But she believes that cross-border capital flows will recover once the volatility subsides.

“Whether it is Europe, the United States, or Asia, the world’s major economies are now in a state of flux, and this change will bring about the greatest challenge to the flow of global financial capital in recent memory,” she said.

“After this period of adjustment, China will still be the world’s largest consumer market and biggest producer in the global supply chain. I believe that global capital cannot give up on the Chinese market, if the Chinese economy can stabilize and recover after the epidemic this year.”

Zhai expects markets to return to a steadier state in the third quarter of 2022 as the pace of U.S. interest rate increases becomes more predictable and the geopolitical environment cools.

Successive interest rate increases have pushed yields on U.S. Treasuries higher than like-for-like Chinese government bonds for the first time in over a decade. The yield on Chinese 10-year bonds dipped below comparable Treasuries on April 11, Bloomberg reported, the first time it has done so since June 2010.

That inversion has helped drive outflows from Chinese sovereign debt: global funds sold almost 52 billion yuan ($8 billion) in March as the yield advantage faded. U.S. 10-year Treasuries were most recently at 3.022%, versus 2.826% for the Chinese equivalent.

“In such a complex situation, it is possible that we do face a period of time when capital flows to places with higher rates of return,” said Zhai.

Over a longer-term horizon, however, Zhai expects cross-border investments to recover to a level that reflects China’s importance to the global economy.

“China’s interaction with the world is irreversible. China has deeply participated in the global economic and industrial division of labor, and is gradually becoming more interconnected with overseas financial markets.”

 

Research-led expansion

With such a long-term view, Tianfeng Securities will keep internationalization as one of its top priorities.

Tianfeng Securities has accelerated its own internationalization since establishing a presence in Hong Kong in 2017. Tianfeng International — the overseas unit — doubled its growth rate in 2021 with total assets approaching 5 billion yuan and about 10 billion yuan of assets under management, Zhai said.

Zhai joined Tianfeng in 2014 from China Development Bank, where she ran the local currency rates trading desk, and has spearheaded the expansion of Tianfeng’s fixed income, research and international offerings.

Research, in particular, has been an important investment for Tianfeng’s cross-border capabilities.

“It is difficult for foreign investors to obtain the first-line research reports in China, or the research issued by Chinese financial institutions.”

“Therefore, the most important thing that Tianfeng has done in the past few years is to export our research capabilities in Hong Kong to the world.”

“It’s not simply about doing business, but more importantly we hope that in this way, more investors can understand the Chinese market. It is our hope that more investors can see the deeper situation and changes through some professional channels and windows, so as to ‘bring them in’.”

 

Room for innovation

China’s capital markets have attracted strong inflows in recent years as robust economic growth and rule changes lured more global investors to onshore stocks and bonds. Those flows have cooled over the past 12 months, however, thanks to domestic policy changes and a shifting global landscape as a result of the Russia-Ukraine war, rising interest rates and rampant inflation.

Despite the near-term challenges, Zhai believes China still has much to gain from engaging with global players.

“The overseas market provides a very good learning place for the Chinese market. Whether it is for China’s market players or regulators, we can study these products overseas and think about how to better introduce them in the Chinese market.”

The difference between bond underwriting in the domestic Chinese market and international markets is a case in point. In the domestic market, pre-approval requirements mean investors have much less input into the terms of the issuance than they do overseas. That can lead to a lack of investor protection and make it harder for companies to access funding in difficult conditions.

These differences add to the challenge facing Chinese financial institutions looking to go global, but they also present opportunities. In contrast to the approval-based system in China’s domestic market, international markets operate under legal systems that allow product innovation as long as it is not prohibited by law.

“Compared to the international market, we still have a lot of room for innovation,” said Zhai.

 

Preparing for the digital era

Technology is a key component of Tianfeng’s international strategy. For Zhai, the Hong Kong expansion would not have been possible without adoption of technologies provided by leading solution providers, which allowed the group to focus on growing the business without the need to develop an in-house technology support system from scratch. That includes Bloomberg’s risk management solutions.

“When Chinese-funded institutions go international, their risk capabilities must be able to keep up. It must have a professional talent team and technology system to manage the risks of overseas asset transactions before it can move forward”

“The CEO and chairman of every Chinese financial institution must make the establishment of a global technology support system a necessary part of internationalization.”

For Tianfeng, however, technology is more than a support system; it is an opportunity to lead the industry. The company invested more than 6% of its entire revenue last year in technology – a figure that has continued to increase over the years.

For Zhai, the next stage in the group’s digitalization is to maximize the value of the data it collects. Tianfeng has built its own financial data center over the past two years and is now working to improve its data analysis and forecasting capabilities to better inform its own strategy and improve its product offering.

“For Chinese-funded financial institutions, I think it’s impossible to exaggerate the importance of technology and digitalization, because we really are living in the digital age,” she said.