At a time when the centre of gravity in commodities markets is moving towards Asia, Bank of China International (BOCI), the investment banking arm of Bank of China, is leveraging the long-held corporate relationships of its parent company to expand into key global markets, such as base metals.
By offering both a mainland China onshore platform and cross-border access for overseas clients, the bank is able to service Chinese clients as well as “bridge the gap” between onshore and offshore markets for international investors and traders, says Arthur Fan, BOCI global head of commodities.
“We are trying to be the market leader in onshore markets-related businesses for our international clients,” he says.
BOCI benefits from its parent’s longstanding relationships with Chinese corporates at all levels of the base metals market – upstream, midstream and downstream. According to Yao Lei, acting chief executive of BOCI Global Commodities (UK), this creates synergies that ensure clients are better served across the entire organisation.
“Being one of Bank of China’s investment banking group companies, we understand Asian clients, particularly Chinese clients, much better than most banks and financial institutions,” he explains. The benefits of this relationship works both ways, providing a more efficient service for clients, he adds.
We are trying to be the market leader in onshore markets-related businesses for our international clients
Arthur Fan, BOCI
“There are a lot more questions the bank would normally need to ask clients [concerning hedging strategies and repo facilities], but their activities are more transparent to [all of] us because of BOCI’s involvement with these clients. Our relationship with the client is beyond that of a broker or a finance provider – we are putting our whole BOC banking facility and service into play.”
Yao says this not only enables a more dynamic interaction with the client, but also helps with the bank’s own risk management activities. Fan believes the bank’s deep understanding of its Asian clients’ risks gives it a definite edge over other international investment banks when it comes to credit and regulatory risk.
“Over the past one-to-two years … we have spent a lot of effort in the area of Chinese regulatory and compliance risk, as well as international, because there are a lot more stringent, new regulations,” he says. “For Chinese regulations, we believe we are in a much better position compared to foreign investment banks to really understand … what those new policies or regulations mean.”
BOCI’s base metals business is growing fast with a 30% increase in on-boarded clients in the last 12 months, according to Fan.
Its deep relations with both international and Chinese clients puts it in a position to offer some unique services, says chief operating officer, Raymond Lau. One of these is the help it can provide clients managing the market risk associated with the arbitrage between base metals inventory in a Shanghai Futures Exchange bonded warehouse and that at an LME warehouse. Given the strong metals demand in China, this arb tends to be at a premium.
With no liquid hedging instrument available, clients who want to deliver Shanghai-held inventory to the LME market risk losing some of that premium as well as having to pay shipping costs. Instead, BOCI can leverage its relationships in the onshore physical base metals space to secure buyers that will charge a pre-agreed, fixed premium for these Shanghai inventories. BOCI acts as a middle man by taking on its clients’ physical inventory in Shanghai and absorbing the premium risk, before selling it on to the onshore buyers. This way the seller of the Shanghai-based inventory continues to enjoy a China premium and can buy cheaper LME metal to sell into Europe without paying shipping costs.
“We developed this solution for our clients with LME business, which means if they have to deliver to the LME, they will not lose the premium of storing physical inventory in Shanghai,” Lau explains. “Shipping the metals would destroy that premium and incur transportation costs. But now, if they deliver to us, we have negotiated a deal that benefits both parties [the onshore buyer and BOCI’s client]. This is a good example of how we manage risk in our business in a dynamic manner.”
Another way BOCI is working to bridge domestic and international markets is with the launch in June this year of its China commodities index. The BOCI CCI tracks 25 different underlying commodities, including metals, in order to provide price information to international market participants as well as helping them access China’s metal and other commodities markets over the longer term, says Fan.
“[BOCI CCI provides] a comprehensive market reference for [international] clients and, eventually, access as China gradually opens up its onshore market,” he says. “We are not just trying to be a commodities player, we are also trying to help our clients achieve the long-awaited breakthrough to onshore markets in both the base metals and [wider commodities space].”