According to the latest figure from the Shanghai Stock Exchange (SHSE) the trading volume of ETFs in SHSE increased dramatically from the beginning of 2012 to August 2013. It is quite obvious from the data that 2013 is far larger than the figure in 2012. The lowest point from this period is April 2012, when the ETF trading volume was only CNY16.232bn; The peak was in June, 2013, with a trading volume of CNY68.712bn, which is over 4 times compared to the figure at the bottom in 2012. Besides, the aggregate trading volume for the previous 8 months is CNY449.687bn, which is far larger than the whole year figure of 2012 of CNY302.658bn. As ETFs are very important components in investors’ portfolio, we estimate that there will be more ETFs launched and the trading volume could be larger as we close out 2013 and move into 2014.
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.
Over the last few decades, the Chinese Central Bank has accumulated massive foreign exchange reserves making it the world’s largest holder at $3.44 trillion. Furthermore the expansion of these reserves, which has accelerated dramatically since 2000, has shown no signs of slowing. Figure one shows foreign reserve levels in China compared with Japan, the world’s second largest holder, along with the United States. Figure two shows the trajectory of China’s foreign reserve levels over the last three decades, which is now over 300 times larger than in 1980.
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.
China’s Central Bank has been rapidly shifting towards full interest rate liberalization. On July 20th, 2013, The People’s Bank of China (PBOC) announced liberalizing the loan interest rate. With this announcement, the deposit interest rate ceiling is the last variable waiting to be liberalized in China.
With interest rates liberalization now on the horizon, competition in deposit interest rates is heating up. Many joint-stock banks have recently increased their long term deposit interest rates about 10%. Everbright Bank increased its 2-year term deposit interest rate from 3.75% to 4.125%, 3-year term deposit interest rate from 4.25% to 4.675%, and 5-year term deposit interest rate from 4.75% to 5.125%. It will be effective until the end of 2013. Since 2012, many city commercial banks have increased their deposit interest rate. We can see the interest rate liberalization trend, and it is currently affecting China’s banking sector from local banks to joint-stock banks, and maybe state-owned banks in the near future.
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.
China is already the second largest economy in the world, however, RMB has really not been fully accepted as a payment currency internationally, which most view as a prerequisite to 'RMB internationalization'.
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.
In respond to Chinese national policy, Chinese banks have been actively advancing and cooperating with small and micro-enterprises in the lending business. The total small and micro-enterprise loan balance keeps climbing, and the proportion of small and micro-enterprise loan to total corporate loan remains on a stable level. Recently, the small and micro-enterprise loan balance reached to 12.25 trillion Yuan, and 28.6% of corporate loan belongs to small and micro-enterprises. The increase in small and micro-enterprise loan not only effectively relieves the constraint of funding issues for the companies, but also promotes the transformation of small and micro enterprises in China.
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.
On July 6th, People’s Bank of China (PBOC) issued 27 third party payment licenses to 27 companies bringing the total of 3rd party payment licenses up to 250. What catches our attention this time is the internet giants Baidu and Sina have both obtained licenses and will focus on online payment and mobile payment as their business scope and likely planning to leverage their huge existing user base.