The Hedge Fund Association, in conjunction with Bloomberg, hosted the HFA - Bloomberg Shanghai Hedge Fund Panel Discussion: International Hedge Funds and Direct Investment in China, in Shanghai on January 5th, 2013. During the event, three experts shared their insight into the challenges and opportunities in China’s hedge fund industry in 2013. I had the opportunity to attend on behalf of Kapronasia and summarized some of my conclusions from the event here:
Margin trading is an important part of financial markets, especially for derivatives although the use of margin trading is still somewhat controversial in certain markets. In China, margin trading is relatively new and the phenomenon and behaviors observed in the markets from the use of margin trading are quite different from those of western markets. In order to better understand the markets, its worth taking some time to analyze the differences and provide suggestions to utilize the opportunities from the development of Chinese margin trading market development.
In the past we haven’t spent too much time looking at the development of China’s financial futures market, but if you were to ask any China capital markets observer what some of the most important reforms of the past few years included, the introduction of the financial futures market would be one of them.
The CSRC’s latest figures show that 57 funds obtained QFII (Qualified Foreign Institutional Investor) licenses in the first 10 months of 2012, far more than any previous year since the program’s inception in 2003. This is a positive signal that foreign investors are more keen to invest in China. Moreover, on Nov. 14th, 2012, Chinese regulators decided to expand the quota by 200 billion yuan to specifically attract RQFII investments; it is predicted that the quota will soon be used up and likely regulators will continue to increase the quota amount.
Earlier this week, Burberry announced lower than expected earnings which largely disappointed and somewhat scared markets. Their slowdown is global, but a key challenge was declining luxury spend from Chinese consumers – which is seen by many as a bellwether for the rest of a general industry slowdown. We’ve talked about luxury spending in China in the past, but it’s worth considering the implications of a potential slowdown in the luxury industry and the implications if the slowdown is indeed an indicator of a shift in the habits of China’s wealthy.
On 27th July 2012, Shanghai Stock Exchange announced a guideline on measures for terminating the listings of poorly performing companies or “special treatment” (ST) companies.
According to the guideline, companies will be traded on a soon to be created new board for 30 trading days before being completely removed from the bourse. During their remaining days on the exchange, shares must trade within a required price range. The upper limit of the daily price movement is 1% while the lower limit is 5%. In addition, an investor can only buy up to 500,000 ST shares each trading day, the guideline suggested.
The new stock-delisting rules are part of broader financial reforms to China’s capital markets, in line with CSRC’s recent statement to launch an efficient system to delisted companies on the foundation of an investor-protection system. It is believed that the introduction of a delisting mechanism will lower volatility, preventing speculators from betting on dramatic fluctuations of underperforming stocks and therefore enhancing the soundness of the market.
The World Economic Outlook Update published on July 16, 2012 announced that IMF revised its forecast for China’s GDP growth rate from 8.2% to 8.0% for this year and from 8.8% to 8.5% for next year. This down-rated outlook followed the recent announcement that China’s economy had grown at only 7.6% for 2012Q2, below the target of 8%. Recent news apparently drew a pessimistic picture for investors and consumers: risk of a hard landing is heightened.
In our opinion, however, the IMF revision could be a catalyst to refuel China’s economy. In fact, many analysts hold the view that the China’s authority is likely to announce more interest rate cuts and deposit reserve ratio reductions to further bolster the credit supply and reactivate the liquidity in the economy, which are essential to promote investment. As a result, consumer confidence will be maintained for the economic growth.
BlackRock recently announced the view that emerging stock markets such as China which have underperformed till early this year, are set to take off in the second half of 2012 thanks to the strong economic growth, slowing inflation, less volatility, and cheaper valuation.
According to China’s State Administration of Foreign Exchange, as of May 2012, the number of Qualified Foreign Institution Investors reached 141, and the total investment quota of QFII reached 26 billion USD. The latest news from China’s securities authorities showed that the QFII investment quota would be increased to 80 billion USD.
According to China’s State Administration of Foreign Exchange, as of April 2012, the total QDII investment quota reached 76.4 billion USD, and the number of Qualified Domestic Institution Investors reached 98. The institutions consist of fund management companies, insurance companies, commercial banks, securities companies and trusts. Among them, fund companies' quota represented 56.1% of the total quota, reaching 42.9 billion USD. Insurance companies accounted for 26.3% or 20.1 billion USD, commercial banks were 12.4% and 9.5 billion USD. Securities companies could invest 2.2 billion USD, the proportion was 2.9%. The proportion of trust company was the minimum about 2.3%, reached 1.8 billion USD. From the above, we can see Funds and insurances held the dominant position in the total quota.
The RQFII (RMB Qualified Foreign Institutional Investor) program, launched in December 2011, allows qualified investors to invest yuan-based funds raised in Hong Kong in the mainland securities market within a permitted quota. According to China’s State Administration of Foreign Exchange (SAFE), as of the end of January 2012, there are 21 financial institutions that have received RQFII qualification and the total quota reached 20 billion RMB. Among them, funds companies and securities companies each accounted for 50%. The latest news from China’s securities regulators indicates that the RQFII investment quota will be further increased to 50 billion RMB in the future, and that the authorities would further enlarge the pilot area and the number of qualified investors.
It has been a few weeks since Tradetech China and it’s worth taking a look back at the event itself. Really in China, there are not too many capital markets focused events and WBResearch saw the opportunity and in 2010 setup Tradetech China.
The QDII (Qualified Domestic Institutional Investor) program was first launched in 2004 initially for insurance companies to invest their foreign exchange funds in the Chinese companies traded in overseas markets, with PingAn insurance company being the first institutional investor to receive a QDII quota of US$8.89 billion. Since then, the program has expanded and now allows institutional investors, including commercial banks, security companies, fund companies, insurance companies and trust funds to raise funds in mainland China and invest in offshore capital markets under the control of China’s foreign exchange regulator.
After being stuck in a bear market for the past few years, China’s stock market hasn't kept up with the country that has become the world’s second largest economy following the U.S.. Facing this bear stock market, Guo Shuqing, the new chairman of the China Securities Regulatory Commission (CSRC), seems confident in China’s stock market, saying that the blue chips in China’s stock market are of real value, although overhaul and reform are necessary now to move the market forward. He has raised several new ideas that may contribute to this needed reform.