Based on CSRC’s data, about 268 firms queuing for IPO in A-share markets chose to quit the IPO process up until 31 May, 2013. 109 of these firms are supported by local VCs and PEs, which take about 41% of the total number of the firms who applied for IPOs in A-share markets. About RMB 8.45 bn investments from local VCs and PEs are locked into these pre-IPO firms, which is challenging for the VC and PE firms who might have been expecting an exit.
The tough supervision of the CSRC is one of the main reasons pre-IPO firms have left the process and only very few meet the standards and of those who did, the worry is that many have cooperated with local stock investment institutions to fake their financial performances to get them listed.
A few weeks ago, we looked at the growth of wealth management in China – a big aspect of wealth management is the Trust industry, which we look at today.
Across multiple metrics, the Chinese futures market grew rapidly from 2006 to 2012. Total assets have grown by 6.5 times over the 6 years, net assets 7 fold and net profit growth by nearly 22 times in 2012 compared to 2006. So it is quite clear that Chinese futures industry is growing at a high speed during the past few years and it is highly likely to expand even faster due to the opening up of the markets.
Based on the recent half-year performance of hedge funds, it appears that the average performance of all types of hedge funds outperformed the market return significantly with macro-economic hedge funds ranked first in returns from November of 2012 to the end of April of 2013.
The latest Chinese manufacturing PMI is 50.6, declining by 0.3 point from March. From May 2012 to April 2013, this PMI figure has hovered the important line of 50 which is the watershed between economic growth and shrinkage. It signals that the growth of Chinese manufacturing economy is still fluctuating, largely because of the transformation and reformation of Chinese manufacturing industries during this period. The trend is expected to continue in the future so we will likely see continued fluctuations.
There are two main sub-industry categories that QFIIs seem to be investing in in China's A-Share market: the mechanics and food & drink manufacturing industries. During the first quarter of 2013, there was a slight decline of 1.55% in the QFII shareholdings in the mechanics manufacturing industry and a 5.78% increase in the food & drink industry.
According to the PBOC, the value of new RMB loans in the first quarter of 2013 are at a three-year high. In the first quarter of 2013, the new lending is 2.76 trillion yuan, growing by 13%, compared with 2.46 trillion yuan in the same period of 2012. It signals that the financing demands in the market start are increasing and analysts believe the total new loans will reach 9 trillion yuan in 2013. More interestingly, among the newly increased loans, 30% of the loans are long-term loans, showing a sign of a strong economic rebound in China.
Wealth management refers to a type of financial analysis, financial planning and management service that banks provide to high net worth individuals. Banks have the obligation to return certain profit by managing customers' funds in an agreed period of time.
The trust industry is currently the fastest growing segment in China's asset management industry so far in 2013. In Q4 2012, the total trust AUM was about US$1.195 trillion. At the end of Q1 2013, this number had reached about US$1.395 trillion representing a growth rate of about 16.7%. That growth rate is actually faster than the growth rate of bank loans / deposits, market growth of the securities market, bonds, funds and insurance industry.
In order to facilitate the RMB’s cross-border settlement and promote the global use of the RMB, China’s central bank (the PBOC) is now building an international payment system called as CIPS (The China International Payment System). This CIPS is expected to take one or two years to launch and will make cross-border RMB trade settlement more efficient and safer.
Kapronasia's latest report Trading China - A Look at the Issues and Opportunities in China's Capital Markets is now available in the research reports section of the Kapronasia website. The report, sponsored by Equinix, is a detailed look at the challenges and opportunities in China's capital markets. The report is free, but does require registration to download. For more information on the report, please look in the research reports section of the website above.
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.
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.