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.
Shanghai has been authorized to become the first pilot city for a new RMB cross-border program – RQFLP (Qualified Foreign Limited Partner, RQFLP) which means offshore RMB can be raised and used for private equity investments in the Mainland. Following traditional FDI (Foreign Direct Investment) and RQFII (RMB Qualified Foreign Institutional Investors), RQFLP has become a new channel for the backflow of offshore RMB. Bank of Shanghai and the Hong Kong subsidiary of Haitong Securities (one of biggest securities in mainland China) have signed a memorandum of cooperation to be the first to issue RQFLP products in Hong Kong. The total quota is about 1 billion RMB. Bank of Shanghai will provide custody services and Haitong securities will take charge of the design and issuance of the RQFLP products in Hong Kong. After being raised in Hong Kong, these offshore RMB will enter into Shanghai for private equity investments.
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.
We have talked about this before, but the latest chart from Reuters / BOC HK is another indication that demand for RMB denominated bonds in HK is waning as yield is creeping up once again. This is creating a bit of a knock-on effect as the cost of financing through RMB bonds rises making traditional USD bonds more attractive. We expect this to continue for the rest of the year actually as there are no near-term events that we are expecting that would change the trajectory or somehow make RMB more attractive.
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.
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.
Earlier this week the Hong Kong Monetary Authority published the December 2011 monetary statistics. Among all of the data, one interesting statistic stood out which was the decline in RMB deposits held in HK also called CNH.
We have talked about this trend in previous commentaries, but the relatively sharp decline could be an indicator of what is to come. One of the key reasons for the decline is no doubt the clarification by the Chinese government on the official procedures for bringing offshore RMB back onshore to be used in the onshore RMB or CNY market.
The main official channel, which is just getting off the ground is the reverse QFII program or rQFII, but since the market was setup, there have been certain exceptions that have allowed offshore companies to bring money back onshore especially if the offshore company is a subsidiary of an onshore entity. Bank of China is one of the companies who was able to take advantage of this.
The offshore market still holds some appeal for Chinese corporates who are looking for loans or to raise money, but struggle to do so in the onshore market due to tighter credit conditions. The clearer rules about bringing CNH back onshore however make raising RMB in HK even more attractive.
Yet, we expect that offshore RMB deposits will continue to slow or decline as more companies take advantage of the expanding channels to bring money back onshore and the RMB as a whole becomes less attractive due to the expected slower future appreciation of the currency.
On December 16th, the China Securities Regulatory Commission (CSRC), the People's Bank of China (PBOC) and the State Administration of Foreign Exchange (SAFE) together issued the rules for the RQFII (RMB Qualified Foreign Institutional Investor) program and officially launched the RQFII programs in Hong Kong to enable qualified Hong Kong subsidiaries of fund management companies and securities firms to use their RMB funds raised in Hong Kong to invest in mainland securities.
According to the rules, the maximum investment quota of RQFII programs is set at about 20 billion RMB, and at least 80 percent of RMB must be invest in fixed-income securities, while no more than 20 percent can be used for investment in stocks and equity funds. These restrictions on investment quota and portfolio reflect regulators’ concern with the adverse effect caused by excessive investment and their priority to keep the mainland financial market stable and to control risk.
As of April 2011, 16 securities firms and 9 fund management companies had Hong Kong subsidiaries which will be considered ‘qualified’ and included in the RQFII approvals in the future. Up to December 23rd, 9 fund management companies first gained the RQFII approves from CSRC, with their RQFII products launching next February at the soonest.
Compared with the total market capitalization of China’s A Share market and the rules that restrict the amount that can be invested in equities, the initial implementation of the program will likely have little near-term impact on the market. However, the latest statement from Guo Shuqing, the new chairman of the CSRC, clearly indicates that the CSRC is committed to encouraging long-term capital to flow into the stock market. The RQFII programs are another important part of this strategy as they will open another significant channel for overseas RMB funds to flow back into the mainland capital market.
The program will likely have a greater impact on HK markets as overseas RMB funds have to date had limited investment choices. Because of this, there will be quite a bit of demand for the RQFII program and likely the first batch of RQFII products will not meet investors’ demands. The 20 billion RMB investment quota will be increased in the future and the influx of capital through the RQFII will inevitably benefit to Chinese Stock in a long term.
As one of ways in which China make its currency to more international, the RQFII programs, by giving a green light to investment of overseas RMB funds in mainland securities markets, will not only make Chinese capital market more open but also facilitate off-shore RMB business by diversifying investment products for overseas RMB funds.
At first, regulators will tightly control the program as to ensure it does not expand too quickly, however, the authorities will continue to widen the investment channel of overseas RMB funds and making the RMB an international currency slowly will not change.
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.
The Chinese October holiday is just wrapping up here in China with millions of people returning from their home towns to major cities and getting back into work. The world markets haven’t been on holiday though and the teetering economic situation in Europe seem to be reaching a head.
Trade Tech came through Shanghai this week. It's only in the third year that Trade Tech has come to China, but it's clear that interest is growing as evidenced by an increasing number of attendees and exhibitors. Although there are few conferences in China concerning electronic trading, Trade Tech has managed to become one of the top events for sell sides and financial technology providers in China largely based on the claim from the event organizers that it represents one of the largest gatherings of buy-sides in China.
China, for once, is relatively quiet – well in certain respects. Today, we’re nearly mid-way through the two week celebration of Chinese New Year as we move into the year of the rabbit. The streets for the past week have been somewhat quiet and offices were closed as millions of Chinese returned to their hometowns to celebrate the lunar calendar new year.
After over thirty years of opening up and economic reform, in 2010, China officially overtook Japan to become the world’s second largest economy, trailing only the United States. Undoubtedly, the global financial crisis that took hold in late 2008 has served as a turning point for China to rapidly transform itself into a global engine of growth.
Without a doubt when we look back at the year in review for 2010, one of the key industry issues of the year will be that of consumer data protection. With numerous breaches at some of the world’s largest banks and credit card institutions, it’s clear that data privacy and protection is still an issue – and one that is back on the front page this week.
With both the Olympics and Para-Olympics now over and the vestiges of Olympic advertising slowly being removed from billboards around China, it is getting back to business as usual in China, or as usual as it could be. For awhile, the feeling was that the Chinese economy would come out of the Olympics, weather the credit crunch and continue on the path of the fantastic growth that China has experienced over the past 10 years. As the situation in the United States worsens, both as a result of the credit crisis and the worsening economic situation, that feeling is changing.
The government of the new Taiwanese President Ma Yingjeou has, over the past few weeks, taken a number of key steps towards financial services liberalization between Taiwan and the mainland that are pointing towards a more integrated financial sector. The two players have always been closely economically intertwined, but there have been many barriers in place that have prevented a more complete integration. Those barriers are now starting to come down.
Taking a step away from financial services for a minute, I thought it fitting to give a view from China of what’s happening regarding China’s recent earthquake. In previous disasters like the SEA tsunami a few years ago or the recent typhoon in Myanmar, I've often found myself detached from the reality of the situation by geographical distance. Although once again I still am to a certain extent, as Shanghai is a distance from the epicenter of the quake, the quake and its aftermath have dominated life in China for the past week and a half.
2008 is turning out to be a another big year for the Shanghai stock market, not because of the bubble-like conditions or growth like what we saw in 2007, but for the changes in market regulations.
The Citic / Bear Stearns fall-out is one example of many where proposed or actual tie-ups in China have changed as of late. Another prominent one is Yahoo and their arrangement with Alibaba, the largest B2B website in China. In August 2005, Yahoo invested US$1B for a 39 percent stake in Alibaba, who then agreed to run the Chinese operations of Yahoo. Now with Microsoft on the hunt for Yahoo, Alibaba wants to buy out the Yahoo stake and is looking for financing to do so.
Amongst all of the events happening in China in 2008, without a doubt, the most important item on the Chinese agenda this year is the Beijing Olympics. Seen by both domestic and international observers as a key indication of China’s development, the Chinese government has spared no expense in preparing for the games.
Year 4706, the year of the rat, begins on February 7th in China this year. With the celebration just under a month away, it’s tempting to use the time to procrastinate on making predictions on what will happen in China is 2008 as it’s technically not the new year here yet, but unfortunately, China doesn’t wait.
The Shanghai stock market continues to defy expectations -- up nearly 100% in 2007. Most of the commentary on the Shanghai market depicts the average Chinese investor as unknowledgeable and following the herd. However, a recent study that we’ve (kapronasia) just completed with Amber (www.amberinsights.com) shows that individual Shanghai A-share investors are actually much more market savvy than commonly thought.
Two years ago in 2005, GE agreed to buy a 7% stake in Shenzhen Development Bank, which at the time was worth US$100M. However, the deal had been held up due due to disagreements amongst the shareholders, one of which was the private equity group TPG. Most of the disagreements centred around government requirements on share restructuring as the initial agreement would have significantly diluted TPG's stake in the bank. TPG eventually did agree to modified terms, but yesterday Shenzhen Bank terminated the agreement.