House of the year, Hong Kong: Guotai Junan International

Asia Risk Awards 2020

Guotai Junan International affirms its reputation to bridge enterprises and investors in China with the world as it saw another year of strong financial performance, even though the capital market has grown extremely volatile over the past 12 months.

In 2019, the annual revenue of the Hong Kong arm of the Chinese securities house grew by 40%; its brokerage business increased 17% while its corporate finance business jumped 36% year on year. This was all despite China-US trade tensions, persistently low interest rates, the global economic slowdown, China’s deleveraging measures and Hong Kong’s social unrest.

“2019 is a historical year for us not only from a P&L perspective but also from a client base extending perspective, as well as the innovation of new products and new business,” says Minna Liao, executive director and senior equity derivatives structurer at Guotai Junan International.

Last year, the securities house’s fixed-income and currency division ranked second in the Bloomberg Asia ex-Japan G3 currency high-yield league table, in terms of deals issued. The firm has also been expanding its equity derivatives and wealth management businesses. In October, it became the first Chinese securities house to enter Vietnam after it successfully acquired a Vietnamese financial services company, and a month later, the firm launched derivative warrants and callable bull and bear contracts products.

On the client base front, the securities house has tapped into corporates and Chinese state-owned enterprises (SOEs), luring them with its unique structured solutions to fulfil their trading and financing needs and to tap the cross-border opportunities.

SOEs present a minefield of financing opportunities for Hong Kong securities houses, with over 11,000 offshore units and assets totalling 7.98 trillion yuan ($1.1 trillion) as of December 2019, according to official data. These SOEs are hungry for a one-stop offshore treasury centre to facilitate the supply of credit to their offshore clients and optimise the allocation of funds between group entities.

Things have not been easy, though, with Chinese regulators restricting the amount of equity an SOE can channel out of the mainland and into the offshore centres. Pressures on the renminbi have been heightened further by persistent tensions between the US and China.

“Private equity, single IPO shares or some hedge funds, are getting popular within the onshore market because the performance of these products is relatively better than mutual funds,” says Sabrina Wang, executive director and head of sales in the equity derivatives department at Guotai Junan International. “Given many of the unicorn companies boomed in the past decade in China have domiciled offshore, if you want to invest in them, you have to invest offshore and meet the offshore investment scope of qualified domestic institutional investor (“QDII”).”

The securities house has designed a participation note for QDI to invest into, and the notional of the participation note would go into the private shares. It also has other solutions including Total Return Swaps linked to privately-placed notes, balance-sheet restructuring solutions using structured notes issued via special purpose vehicles (SPVs), and cross border solutions delivered in collaboration with its parent company on the mainland.

Last July, Guotai Junan International entered into the Master Agreement for Derivatives Transactions in the China Securities and Futures Markets issued by the Securities Association of China with Guotai Junan Securities.

“This business can provide Hong Kong clients the access to onshore A shares and provide the onshore clients the access to HK shares, including IPOs,” says Liao. “We have executed more than 100 trades this year. It’s also a good opportunity to maximise our internal intergroup resource and enhance our branding of Guotai Junan in Hong Kong and China markets.”

In 2019, the securities house successfully sponsored eight initial public offering projects in Hong Kong, ranking fourth among all investment banks across the market.

The stellar financial performance owes much to its rigorous risk management efforts. The securities house has imposed various trading limitations and order restrictions in order to comply with Hong Kong and China exchange rules, and to better manage its market, liquidity and concentration risks.

“We customise our system according to clients’ risk controls, evaluation reports and trading limits. We also impose various effective controls and limitations on our systems to comply with Hong Kong regulations on trading H and A shares,” says Liao.

Guotai Junan International is confident in guiding its clients through the ongoing market conditions that are brought about by the coronavirus pandemic and the frictions between the US and China, where the interest rates are getting lower and the USD/CNY currency pair is becoming more volatile.

“We will see a lot of demand on financing for clients because it’s difficult for them to channel 100% notional from onshore to offshore,” says Wang. “We have a strong pipeline lined up to provide financing on a full range of underlying to help clients increase yields.”