Displaying items by tag: capital markets

Shortly after Jumei Youpin, JD.com listed in US, Zhaopin, an online recruitment platform, listed on the NYSE on June 12th, 2014.

Since the IPO hiatus last year many qualified mainland companies have been waiting for new capital. With banks traditionally more supportive of SOEs and PE not being able to invest since much of their capital have been locked already, many well-managed, fast-growing companies were starving of capital.

The 2014 year seems to be a year for banks to pad their capital base. Previous heated discussion was around Tier 1 capital sufficiency, after which additional capital has been supplemented via issuing preference shares by SPDB, Bank of China and Agricultural Bank of China.

Published in China Banking Research

State Council is China’s main governing body and its opinions provide guidance for the financial industry and allow to peek into what the government has in mind for the markets in the coming years.

On May 22nd, JD.com listed on NASDAQ, with the timing being somewhat of a surprise for many market observers.

In year 2014 we expect to see numerous new policy and regulation updates on the financial reform of Shanghai FTZ. Where are we today?


Shanghai local government and Chinese central government will endeavor to expand the market functions, deepen the opening of local financial markets to foreign investors, increase the number of financial institutions in the FTZ, encourage the financial business innovation and make Shanghai more of an international financial center. 

Some of China's financial reforms are under consideration or have already been executed in 2014, such as setting up crude oil futures, international gold trading, financial asset trading, syndicated loan trading platforms and building nationwide trust registry service institutions. Besides, rules regarding foreign and FTZ-registered firms’ parent companies RMB bonds issuance are on the way. Moreover, Shanghai FTZ regulators will also consider introduction of free trade account management by allowing financial institutions to set up FTA (Free Trade Account) accounting units segregated for residents and non-residents. Furthermore, Shanghai FTZ regulators encourage direct investment abroad from local firms and private equity funds. The main contents of Shanghai FTZ’s reform could be described as a ‘1+4’ policy, where ‘1’ stands for risk control segregate account system; ‘4’ stands for interest rate liberalization, foreign exchange liberalization, RMB cross-border utilization and RMB capital account opening.

FX reform and FTA accounts

PBOC announced that, starting on March 17, 2014, the interbank RMB/USD spot price’s fluctuation spread increased from 1% to 2%. For commercial banks, the fluctuation range of RMB/USD spot price offering to the clients could be expanded from 2% to 3% from the mid-price calculated by Chinese interbank FX market. This is the third time for PBOC to expand the fluctuation range. Analysts say the expansion in RMB/USD spot fluctuation range is a clear signal that RMB will be internationalized in the near future and Shanghai FTZ is thought to be a test-bed for that. The most prominent aspect of Shanghai FTZ FX reform is the FTA (Free Trade Account). FTA is essentially a free trade bank account for Shanghai FTZ registered firms, very similar to an offshore bank account, which enables free capital flow inside the FTZ. FTA system allows both foreigners and local residents to get their money in and out through FTZ. Overall, there are mainly 3 types of FTA accounts. Local firms in the FTZ could open FTA accounts; individuals in the FTZ could open FTA accounts; foreign firms in the FTZ could open FTN accounts. As regulators are treading conservatively with hot money inflows and money laundering risks in mind, there is still no detailed timeline. However, we believe the FTA mechanism will be released in 2014 or 2015 as a momentous milestone in China's financial reform history.

Interest rate reform

In March, 2014, a PBOC official claimed that the sequence of Shanghai FTZ interest rate reform will be ‘liberalize interest rates for foreign currencies prior to RMB interest rates; free the loan rates prior the deposit rates’.

There were actions towards interest rate reform in Shanghai FTZ from the regulators. PBOC announced that from March 1st, 2014, the deposit rate of foreign currencies below the amount of USD3 million would be liberalized, which actually removed the ceiling for foreign currencies’ deposit rate. This is thought to be an important step on the road to fully liberalized interest rate reform. The next step could be liberalization of the deposit rates of the local currency, which may not only be applicable in Shanghai FTZ, but also the rest of China.

Cross-border RMB utilization

On Feb 21, 2014, PBOC released the detailed regulation on expanding the usage of RMB overseas, which simplified the process of RMB overseas usage under current and direct investment account. However, overseas RMB financial scale and usage range will still be restricted, as well as cross-border e-commerce transactions and RMB trading services. 
Six banks constitute the first batch of firms applied for the cross-border RMB settlement licenses. ICBC and Bank of China helped their clients within the zone to make an overseas RMB loan; Bank of Shanghai, HSBC and Citi Bank launched cross-border RMB current account centralized collection and payment services; Bank of Communications signed the first overseas RMB borrowing service for the non-bank financial institutions.

Capital account liberalization (to be announced)

In the future, the capital account might be opened for local and foreign investors. As Chinese reformers are relatively prudent and conservative, the liberalization process of capital accounts have been advancing relatively slowly so far. One important step in the process will be a gradual opening of commercial futures market to foreign institutional investors.

2014 version of ‘negative list’ (possibly to be released in the 1st half of 2014)

In the 1st half of 2014, a new version of ‘negative list’ will be released to update the 2013 version. Although it is not clear what items this version may include, there are two aspects which are certain. One aspect is that the contents included in the negative item list will be shortened, which implies that the restrictions on types of companies to register in the zone will be reduced. The other aspect is that Shanghai FTZ might cooperate with Hong Kong to introduce advanced practices from the city.

We also have an in-depth report on Shanghai FTZ available here.

The latest figure announced by the CSRC indicates that in early 2014, the number of Chinese securities investment funds registered increased, with the total turnover declined dramatically.

On April 20th, the CEO of ICBC, quoting data from internal sources, claimed that the estimated scale of shadow banking in China is around RMB15-20tn, which is relatively small in scale to GDP when compared to shadow banking in more developed countries.


In addition, the leverage used in the Chinese shadow banking industry is not as large as other countries, so he argued that it is not necessary to worry about systematic risks in the Chinese financial system, but he still admitted there are non-systematic risks caused by shadow banking industry.

However, many independent financial analysts say that the scale and risk involved of shadow banking are underestimated and there might be increasing number of events happened in 2014 around shadow banking in China.

Shadow Banking in China Big Part of GDP 2014

Published in China Banking Research

On April 14, 2014, Shanghai Stock Exchange-traded *ST Changyou was delisted, becoming the first state owned company to be delisted in A-share markets.

As US SEC’s investigation on large investment banks recruiting Chinese governmental officials’ and SOE senior managers’ children is going further than any such probe before, the dark side of foreign companies operating in Chinese markets is gradually being exposed to the public. However, that probably doesn’t come as a surprise for the Chinese public which has known and suffered from the ‘unwritten rules’ for a long time. 

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