China Capital Markets Research

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.

What is QDII

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.

On Feb 13, 2012, the government bond futures trading simulation was launched by the China Financial Futures Exchange (CFFE). This is an indication that China is on the track to reintroduce the trading of government bond futures after the central government officially closed it 17 years ago in 1995.

In fact, China first launched government bond future trading in Dec. 1992, but then in 1995, the CSRC halted this market mainly due to a scandal surrounding the trading of the 327 contract. Besides the scandal, the number of bonds issued at that time could not support the large volume of futures trading, and there was insufficient market supervision to sustain a healthy government bond trading market.

In comparison, the situation now is totally different. The government bond balance of 6.3 trillion RMB, representing a steady increase in the volume of bonds issued, and the strong government bond market liquidity both support potential further development of government bond future trading. The CSRC has allowed about 10 institutions to participate in the trading simulation, including commercial banks, securities companies and future companies. Until now, the trading simulation has worked well.

The trading simulation may be a signal from the CSRC that it plans to re-launch the government bond futures, a major financial derivatives instrument. Compared with more developed markets, China’s market now lacks effective interest rate risk management tools, a situation inconsistent with possessing such a large volume of government bonds. The reintroduction of government bond future will allow financial institutions and industrial enterprises to better hedge against interest rate risk. However, when the government will re-launch the government bond futures still remains unknown. Keep in mind, it took 3 years for equity index future to get on the right track after nearly 3 years testing program.

The annual highest level of economic conference in China, Central Economic Working Conference, which will suggest the direction of the country’s next-year economic policy, is just around the corner and this year is just the first year of China’s twelfth five-year plans.

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