China initiated its asset securitization program in 2005 for securities companies. However, after the subprime mortgage crisis swept over the globe, regulators in China temporarily stopped the program because although it provides liquidity to markets, securitization also comes with significant risks. In 2012, the asset securitization program was initiated once again with permission from the state council and the China Securities Regulatory Commission (CSRC). Regulations were changed to allow for more types of asset securitization and the threshold for securities companies to enter was lowered. The following report provides a summary regarding the participants, regulations and current conditions within China’s asset securitization markets.
According to the latest figures from the CSRC, the number of securities investment funds for A-share market increased from 1,173 at the end of 2012 to 1,369 by the end of July, 2013. The structure of investors in Shanghai's A-share market has long been an interesting phenomenon for Chinese A-share market as individual investors comprise the major market force, which is thought to be a sign of a immature capital market. Currently, as the number of institutional investors is growing fast, it indicates to some extent that Chinese capital market is gradually developing towards the direction of a mature capital market, at least from the investor structure perspective.
According to a 2013 publication by Goldman Sachs, there are still major differences between US and Chinese capital markets. The most prominent difference is that capital markets in the US are much larger than China’s in all sectors except for bank credit as shown in the figure below.
The Chinese banking credit sector has expanded in recent years which is now at 128% of China’s GDP compared with 48% in the US. Thus the Chinese economy is highly dependent on bank credit, which can be dangerous for the country in the coming years.
In other sectors, there are large gaps between the size of Chinese and US capital markets with the former still lagging behind the latter. Thus, there are many opportunities for China to develop its stock and fixed income markets, along with its insurance and asset management industries. Among these, the asset management industry seems to have the greatest growth potential.
On August 6, 2013, Chinese securities companies received ‘the notice of preparing the initiating stock options full simulating trading works’ sent by the Shanghai Stock Exchange. This information implies that SHSE is already fully prepared for the launching of stock options. Although there is no clear timetable for launching the stock options, it is likely that they will appear in Chinese capital markets in 2013 or 2014.
Throughout the history of capital markets in China, public listings, or IPOs in the Chinese A-share market have been suspended 8 times; we are currently in the 8th suspension period. The modern Chinese stock market is only about 23 years old and of that, IPOs have been suspended for nearly four and a half years, which makes up almost 20% of the market's history. There is still no actual timetable to reopen the IPO market, but according to some market information, it could be possible at some time in August or September, 2013.
According to The Wall Street Journal, the fundraising of PE funds in Asia continued to drop in the first half of 2013. Compared to the US and European markets, the amount of funds that Asian private equity funds raised was the smallest among the three regions, while the percentage decline is the largest. The slowing Chinese economy is thought to be one of the biggest reasons for the decline in fundraising figures as well as the IPO suspension in China; only US$16 billion in public listings were completed in the first half of 2013.
On 4 July, 2013, The China Securities Regulatory Commission (CSRC) announced that the state council of the People’s Republic of China (PRC) had approved the Treasury bond futures’ return to trading, specifically on the China Financial Futures Exchange (CFFE). Currently, the T-bond futures are under the final preparation stage and it will take approximately two months for this preparation period before they officially are released and start trading. So the most likely time for T-bond futures to be released is in early September.
As seen from the chart below, the trading volume of Shanghai and Shenzhen stock exchanges since August, 2011, the trading volume has fluctuated in a relatively low level, compared to the previous few years’ performance. We see this being a result of retail investors' lost confidence in a stock market that hasn't performed well recently, or at least not to the same levels as a few years ago.
This may be very temporary however as a number of the recent Chinese economic announcements and regulatory changes will likely have impact on the country as a whole and more specifically in the financial sector.
Watch this space.
The latest figures showed that in the first 6 months of 2013, the amount of FDI in China increased to US$61.98bn, a 4.9% increase compared to the first 6 months in 2012. Although the future of Chinese economy is under the threat of slower GDP growth, the figure illustrates that foreign investors are still interested in China as an investment destination.
The latest figure showed that in the first 6 month, 2013, the amount of FDI in China increased to $61.98bn, a 4.9% increase compared to the first 6 months in 2012. . Although the future of Chinese economy is under the treat of slower down GDP growth rate, the figure illustrated that the foreign investors’ passion of investing in China remained at a high level in the first half of 2013.
According to SWIFT (the Society for Worldwide Interbank Financial Telecommunication), the Chinese Yuan (or RMB)'s share of global payments hit a new record high of 0.84% in May 2013, after the total value of yuan payment around the world increased sharply by 24% last month, compared with the average growth rate of 1.9% across other currencies. SWIFT also pointed out that China yuan is still the 13th most-used currency in the international trade. The growing demand for RMB settlement will continue to increase the use of yuan in future.
Based on CSRC’s data, about 268 firms queuing for IPO in A-share markets chose to quit the IPO process up until 31 May, 2013. 109 of these firms are supported by local VCs and PEs, which take about 41% of the total number of the firms who applied for IPOs in A-share markets. About RMB 8.45 bn investments from local VCs and PEs are locked into these pre-IPO firms, which is challenging for the VC and PE firms who might have been expecting an exit.
The tough supervision of the CSRC is one of the main reasons pre-IPO firms have left the process and only very few meet the standards and of those who did, the worry is that many have cooperated with local stock investment institutions to fake their financial performances to get them listed.
A few weeks ago, we looked at the growth of wealth management in China – a big aspect of wealth management is the Trust industry, which we look at today.
Across multiple metrics, the Chinese futures market grew rapidly from 2006 to 2012. Total assets have grown by 6.5 times over the 6 years, net assets 7 fold and net profit growth by nearly 22 times in 2012 compared to 2006. So it is quite clear that Chinese futures industry is growing at a high speed during the past few years and it is highly likely to expand even faster due to the opening up of the markets.
Based on the recent half-year performance of hedge funds, it appears that the average performance of all types of hedge funds outperformed the market return significantly with macro-economic hedge funds ranked first in returns from November of 2012 to the end of April of 2013.