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.

Cracks are starting to show in the once impervious armor of China's online finance platforms as yields have dropped 20% from their highs. Ranging from about 4.7-5.6%, the current highs are much lower than the 6-8% that we saw at the end of 2013 and beginning of 2014.


China's online finance platforms facing headwinds

Realistically though, this isn't surprising. As we have discussed before, these platforms were running on borrowed time. Whilst the business model made sense, the inter-bank lending rates and the negotiated deposits that the main China online finance platforms were able to negotiate were a bit of a perfect storm for the platforms.

Now as the banks have put limits in place on the amount of money that can be moved on and off the platform at any one time, we're starting to see the market's reaction to what has caught most banks and the regulators completely off-guard. This is unlikely to be the last push-back from the banks on these new financial products. 

Unclear Regulation

Yet the platforms still have over 1.45 trillion yuan (US$230+ billion) on their platforms and this is unlikely to rapidly decrease anytime soon. 4-5% is still much better than the average retail consumer could get on a bank demand deposit in most of China's main banks and the convenience can't be beat - very easy to get money on and off the platforms, although within the limits set out by the PBOC.

This is far from the end of the story thought. We expect the growth of the platforms to certainly slow and although its still a bit unclear as to what the regulation will be, further regulation and requirements from the PBOC is inevitable as we go forward in 2014. This is all the more critical as Alibaba moves forward on the IPO plans. Can the company count on that part of the business to still drive revenue?

The latest figures from online saving funds financial statements have shown that the BAT (Baidu, Alibaba, Tencent) online money funds continued expanding. The 2014Q1 data reveals that Tianghong Zenglibao, relying on the huge client base of Yuebao, lead the market and is the first online saving funds that exceeds RMB100 Billion.

On April 10, 2014, the Chinese government approved the proposal for Hong Kong-Shanghai Stock Market Connect program, which will allow mainland investors to directly trade stocks in Hong Kong market and Hong Kong investors to trade equities in A-share markets.

Over the next week, we'll be publishing a number of articles looking at the upcoming Alibaba IPO which could be the largest tech IPO ever. Today we look at the financials filed with the SEC. 

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. 

The latest statistics about the A-share markets illustrate the main industries that QFII funds invested at the end of 2013, according to data from 1334 listed firms’ 2013 annual reports. The banking industry is the most attractive industry for QFII investors, taking about 1/3 of the total new shareholding volume with the steel industry and automobile industry ranked the 2nd and the 3rd.

The banking industry makes sense because of the relatively low valuations. The steel industry is currently suffering in China, so QFIIs likely have confidence that Chinese urbanization and development of automobile industry will continue. For automobile industry, as Chinese government intends to push hardly on new energy vehicles especially electricity-powered vehicles, could pose an interesting QFII investment allocaction.

QFII China Industry Allocation

High frequency trading (HFT) has roughly been in existence since 1999 in the US as execution times have shortened from several seconds to millisecond or even microseconds due to advanced trading technologies and a general demand for increased speed. Figures from August 2013 showed that in the global FX market, HFT took approximately 40% of the total trading volume, within which, almost half of the volume happened in the spot market. For the global futures market, HFT volume represents about 40% of the total volume. In the equities market in the US, HFT volume took approximately 73% of all equity order volume. Typical strategies executed by HFT traders are trading ahead of index fund rebalancing, market making, ticker tape trading, event arbitrage, statistical arbitrage, news-based trading and low-latency strategies.

You'd be forgiven for missing it, but in the buying spree that we've seen in the last couple of weeks from Alibaba, one of the most significant investments was for a controlling stake in Hundsun Technologies. The ~US$532M investment in the firm means that Alibaba now has control of nearly 95% of all domestic trading systems in China and continues to consolidate its position as a financial technology provider.

A couple of days ago, media announced that Alibaba had made a substantial investment in InTime, which is a Hong Kong company that manages mainland China upper-end retail malls. These malls are typically branded InTime, but are multi-brand inside where each brand has a small section and potentially dedicated staff to that section. 

On March 3, 2014, the chairman of the council of the Shanghai stock exchange Gui Minjie declared that there is no technical barrier for the release of T+0 trading mechanism specially for blue-chip stocks traded on Shanghai Stock Exchange. The chart below showed that the large-cap stocks based indices have lower turnover rate than the indices with more proportion of small and mid-cap stocks. The T+0 in Shanghai Stock Exchange could possibly stimulate the trading of large-cap stocks on A-share markets. The speech of Mr. Gui implied that the T+0 mechanism might be close to launch in 2014.  

China Market Turnover

February 2014, represented another month of decreasing commission fees in China's capital markets as the entrance of China's technology giants in internet finance starts to affect not just banks, who are losing deposits, but securities brokers whose fees are being squeezed. 

Yu’ebao had already made Tianhong Asset Management the largest one in the public fund industry in China in early 2014. However, the scale of Yu’ebao has continued to grow with the latest figures showing the AUM of Yu’ebao reaching RMB400bn on Feb 14, 2014, a leap of 60% compared to only one month ago. The speed of capital inflow is still accelerating in 2014. We may witness Yu'ebao becoming the largest money market fund in the world soon. 

The fast expansion of Yu'ebao crosses 400B under managementYue bao AUM data of Chinese money market funds, especially the ones leveraging Internet Finance, reflects the large wealth management demand potential of Chinese market and new innovative finance forms that will appear in the Chinese market in 2014.  

According to data from the China Securities Depository and Clearing Corporation Limited (CSDC), there were 261 new Qualified Foreign Institutional Investor (QFII) accounts opened in 2013 which represents about 43% of the total QFII account number from 2003 to 2013. Compared to 2012 figure. Number of QFII accounts rises by 129%.

So why are foreign investment institutions so interested in opening up accounts to trade the Chinese market when returns are so low? One reason is that the mainland regulators have been pushing towards more open markets and lowering the QFII requirements with the intent of introducing foreign capital to provide better liquidity in an anemic a-share mainland market. In addition to new accounts, more than $49.7 billion in QFII investment quota was approved in 2013.

The potential second reason is that foreign investors see potential opportunities in the mainland market either with current relatively low valuations or in the anticipation of future market growth if the market does pick up. 

 

New QFII account growth

The Shanghai Stock Exchange has been in the doldrums for the past couple of years and was the worst performing Asian exchange of 2013.

2013 will remembered as an incredibly dynamic year for China’s financial services industry. From the increasing number of hedge funds in the market to the emergence and regulation of Bitcoin, industry observers, investors, participants and regulators have had their work cut out for them keeping up with the market.

On November 27, 2013, the Ali-cloud division of Alibaba group announced the launch of Ali Financial Cloud services.

Background

Ali financial cloud services has been developed to provide secure and stable IT resources and internet operation services for financial institutions including banks, funds, insurance companies and securities companies. The service is based on cloud computing, with the cooperation from many well-known financial product solution providers and Alipay’s standard connection portal and a completely sandboxed environment.

At current stage, China's approximately 2,000 small and medium banks are the focus of Ali Financial Cloud as these banks typically do not have enough capital and technology experience to develop their own robust IT structure, so outsourcing is thought to be a low cost and efficient way for these banks to process large amount of data and information.  

The claimed benefits Ali Financial Cloud include:

  1. Enable Small and medium banks to have their own online banking system and mobile banking systems and expand e-commerce and online banking services in the rural areas.  
  2. Provide stable and strong business processing capabilities for small and medium banks during high demand periods
  3. Enable small and medium banks with smaller technology footprints to develop innovative products and solutions that would typically only be available to larger banks
  4. Reduce IT support requirements

One example provided by Ali cloud website shows the processing capabilities of Ali cloud. About 300 million transactions of Yu’ebao could be cleared within 140 minutes, or about 35,000 transactions per second. Some financial firms are already using the Ali fianancial cloud including asset management companies, rural banks, regional banks and insurance companies.  

Historical Context

Cloud computing in China's financial services industry, similar to other global markets, has been slow to take off. Players like IBM have in the past setup comprehensive cloud computing research centers to attempt to move the market, but none have been incredibly successful in gaining a foothold. 

2014 might be the year when we see this change. Cloud technology and security has become increasingly sophisticated and with an increasing profit squeeze due to liberalising interest rates, banks will be looking for ways to increase revenue, reduce cost, and more importantly, stay innovative.

2014 - Year of the Cloud

Certainly Cloud will be a key industry topic as we move into 2014 with major players besides Alibaba including IBM, 21Vianet and Tencent all vying for a part of the increasing cloud computing pie.

It will also be interesting to see the level of innovation that happens in the space. Alibaba has rapidly moved beyond just an IT / e-commerce company to provide a variety of products and services beyond just technology. Its Yu-ebao product is forcing banks to re-think their retail investment products and how they price and distribute them – it has completely changed the industry.

With China's cloud services in the financial indusry being a key topic of discussion in 2014, could we see Alibaba do the same thing it has with 3rd Party Payment Platforms?

The China Securities Regulatory Committee (CSRC) announced in December that the currently non-active A-share IPO market would reopen at the end of January, 2014.

Shanghai Stock Exchange and China Securities Index co.ltd announced that the new TMT (Technology, Media and Telecom) industry index and national defense indices would be released on December 25th, 2013.

Hongkou is a geographic district in Shanghai, on the west side of the Huangpu River, north of the center of Shanghai and close to Pudong District. The Hongkou Hedge Fund Park was officially established on Oct. 18, 2013, as the first test-bed specifically for developing local hedge fund industry and introducing foreign hedge funds in China. Through market reforms and special incentives, the Hongkou government hopes to make the Hedge Fund Park a key part of Shanghai, and indeed China’s, hedge fund industry.

yuebaoThe latest figures from Tianhong Asset Management show that the AUM (asset under management) of Yu’ebao deposits, the currency market fund which is co-launched by Alibaba and Tianhong on 13 June, 2013, has rocketed from June 13th to November 14th, 2013, from 0 to CNY100B. Now Yu’ebao is the largest fund in China leveraging it's enormous Taobao, T-mall and Alipay customer base.

The success story of Yu’ebao has not only encouraged the Chinese IT giants and online payment providers to enter the asset management market, but also is a worry to the traditional asset management firms. Currently, most public funds in China sell their products on their own websites or choose to cooperate with the online platforms to sell their products. Asset managers do recognise the benefit of selling funds online including low cost and convenience, but struggle as they simply just do not have the customer base of Alibaba/Alipay.

Date   13 June 30 June  9 Sept  14 Nov
AUM (CNYB)  6.6  55.65  100

The U.S. Government Shutdown and Its Impact

The shutdown of the U.S. government ended as the two U.S. political came to an agreement to delay the decision to January-February of 2014. This means that the global market instability will likely still be on-going until the beginning of next year. This also means that the U.S. market may not be as lucrative and attractive as before, as critical decisions regarding the debt ceiling and government funding are still not solved.

It is important to figure out the impacts of the incident on Chinese economy, as the U.S. and China are the world’s number 1 and 2 economies with strong ties. The index trends in East Asia, oil consumptions and imports by China, and geo-political status of China are all important aspects to consider to understand the impact.

Market Change after the End of Shutdown

Shanghai CSI Peformance

The Chinese stock index fell right after the announcement of the end of the government shutdown, while other East Asian and Southeast Asian market indexes rose. Although, it is hasty to conclude that China had served as a ‘refugee market’ or as an alternative to the U.S. market just from that factor, one could draw certain implications that people were shifting their investments in and out of the US / China as a the appeal of each market shifted.

U.S. – China Relations from multiple angles

According to the U.S. Energy Information Administration’s latest report, China surpassed the U.S. in terms of oil imports in September, due to oil consumption surpassing production. Part of the reason behind this is that the U.S. has been decreasing the total import of crude oil – China is replacing the U.S. demand. If this trend continues, and the decrease of oil price also continues, China will benefit from the outcome by stabilizing the export production cost, but at the same time become more susceptible to the oil price. The economic ties with the U.S. has to be a factor here, as crude oil imports to China are used for the refined oil products and the production of manufacturing goods that go to other nations around the world. Since the U.S. is the biggest individual nation in terms of absorbing Chinese exports, the susceptibility will only be counterbalanced when Chinese exports are sold with minimum hindrance.

China's Oil ImportsThe ultimate factor, however, is the sovereign debt of the U.S. held by China. In 2011 China already became the top US Debt HoldersU.S. government debt holder, accounting for the 8 percent of total U.S. public debt. Even in percentage terms the figure is very high. As long as the U.S. has the economic power to pay back the interest and return the principal for the matured bonds, both the U.S. and China have little to worry about. However, the current talks on debt ceiling and budget talk have changed the atmosphere. For the U.S. when a single country has such high debt in time of financial instability is one more thing to worry about. For China, it is now holding a potential time bomb – even though the chance of the U.S. default is very low, the lessened credibility of the U.S. government bonds means the future investment channel is narrowed. The portfolio of Chinese government requires changes, and the currently-held debt needs to be reevaluated in terms of the possibility of return. Chinese government needs to diversify its risk coming from the U.S. instability.

Geo-Political Movements of China

As China is a well-known politically stable country with one party system, at the moment of the U.S. instability, the characteristic is clearly a benefit to China. However, in modern economy, nations maintain close political and economic relationship. This means the U.S. instability will have a likely negative impact on China.

Then the question we have to ask is how much impact the U.S. instability will have on Chinese economic growth. It is possible that China would not be able to enjoy high growth rates it used to for the next 3 to 4 months, as the U.S. is one of the top 3 markets for China. If the U.S. market is not able to consume as many goods as it used to be due to the instability, China will face further reduced exports. These exports alone represent about one fourth of the total GDP, and the net export is about one eighth of the total GDP. Therefore, if China export to the U.S. slows by a considerable amount because of the instability, the consequence for China will not be great. Whether it was done to counter such consequence is not clear, but the president Xi and the premier Li’s meetings with the leaders of ASEAN nations can be seen as a type of insurance for China. This will not only increase the geo-political strength of China, thus further stabilizing regional politics, but also create more economic ties with the region to divert exports and investment channels.

However, so far the “magnet of economy” is still at the U.S. market, and the power of the magnet is very strong. In other words, the determinant of global market trends is the U.S. and that fact will be the key to the Chinese economic prospects. The geo-political factor of Southeast Asia is not yet strong enough to counterbalance the current instability formed in the U.S. market and politics.

Possible “Next Steps” for China

The Chinese market may not show a sudden change, but the prolonged instability will certainly diminish the economic strength that China has been showing for a couple of decades. This means China has to prepare for certain changes that could affect its future growth. Before the shutdown, there had been worries on the U.S. Federal Reserve’s (the Fed) tapering on quantitative easing. Now the concern on the U.S. budget and debt ceiling talks adds more worries to developing nations. Nations including China will have to worry about whether to focus on development as they have been doing, or to focus on stabilizing the domestic economy and strengthening the weak links within their own economy. As the government shutdown caused economic instability, the Fed will most likely continue its quantitative easing to secure economic conditions for now. That does not mean the instability of the Fed’s tapering is removed, because it is like the status of the U.S. budget talk: the quantitative easing is only a temporary solution.

Even though China has a huge domestic market, in time of economic instability, the driving force of economy is hard to find. Export is not going to help China go through this hard time as the whole world is suffering together, and domestic consumption growth is still up in the air. In September, Chinese exports faced an unexpected year on year drop. When looking at the income of Chinese people, that does not seem to help increase domestic consumption. Other possible economic boosts such as government spending or investment are still viable options, but the question is “how long and how much the Chinese government and corporates are willing to put money into it?”

Not only that, China also faces the question of liberalization of the market. China has shown strong commitment to liberalize and open up further to the global market, especially in financial and trade sectors. The recent interest rate reform and Shanghai Free Trade Zone were two of the examples that have shown Chinese commitment through action. Since there is instability in the global market, the economy will not be as energetic enough as Chinese government expected it to be for its liberalization process. This means that China can cut its effort down to open up the market and slow down the pace of economic expansion. This could be a problem if the investors around the world, who think China will still show strong growth, find out about the policy changes in China. Even if the investors have anticipated the slowdown, the actual impact of Chinese slowdown will be massive, considering the size of Chinese economy.

Also, Chinese government external debt has increased significantly in recent 10 years, more than tripling since 2002. China has funded many projects through debt, and if the economic expansion diminishes, it will adversely affect the debt / deficit balance in China. The Chinese government will have a harder time borrowing money at the same interest rate, and have a harder time paying back debts as the profit from projects diminishes due to the domestic economic slowdown and the global economic recession. Then the government projects will have to face the new consequence of either reduction in size or complete shutdown, and overall investment and financial inflow will diminish, which can be a vicious cycle. Even though Chinese government will put extra effort to prevent such cycle, the diminishing trend is inevitable.

However, It could be a good opportunity for China in terms of restructuring its domestic economic design. Rather than focusing too much on expansion and growth, China can restructure its economy through strengthening small and medium enterprises, or increase the consumers’ purchasing power. The latter might be a harder task for China, as it includes increased welfare, restructuring of wage systems, and implementation of social safe-nets – this is even hard for other developed nations. However, strengthening SMEs is achievable through several banking reforms that would either guide banks to give more access for SMEs to capital, or allow more commercial and private banks to open up and target SMEs as major customers.

China’s Possible Direction

Overall, China is facing a key decision-making period as the U.S. economic power is in question due to the prolonged debt ceiling and budget talks. With strong economic ties to the U.S., China faces trade-offs: whether to continue its economic expansion policies or to restructure its economy. It will be detrimental for China to continue the expansion as there will be no country to be able to support such moves economically. Especially when the world’s number 1 economy is unstable, the scenario is highly unlikely. Hence China will stay low and withhold any further reforms that can tip off the balance. Possible policies could be to strengthen domestic markets, but even then, the implementation of policies will not come fast, as the instability from the U.S. is not predicted beforehand. Nevertheless, this can be the valid option for China at this moment – the restructuring is an inevitable process for a developing nation. 

Recent figures from Eurekahedge showed that the general ROI of Asian hedge funds (10.1%) surpassed that of North American hedge funds (6.3%) and Europe hedge funds (5%) for the first 3 quarters of 2013. However, among Asian countries, Japanese and Chinese hedge funds have experienced relatively high ROI while Indian and South Korean hedge funds suffered from negative ROI. Market analysts suggested that, the high ROI from China is because of the sustained and relatively fast economic growth, while the high ROI for Japan is for the massive economic stimulation. 

Global Hedge Fund Performance

Cash is always king and no more so than in China. Traditionally a very cash-based market with many High Net Worth Individuals (HNWI) skeptical of having someone else manage their money, wealth management got off to a slow start in China. It started with the establishment of few foreign private banking such as Citi Bank, UBS, and HSBC in China in 2006. In 2007, Bank of China was the first Chinese bank that established a private banking department in Beijing and Shanghai.

Business was slow initially for both foreign and domestic banks. Trust was a key factor – many HNWIs were not comfortable with someone else managing their money, much less a foreign bank, but the sophistication of services offered was also very low. Even today, the private banking business mainly provides consulting services for asset allocation and very little forward planning. Most banks push particular products rather than tailored financial plans that take into account not just a person or family’s financial situation, but their future life events.

Although wealth management is still in a nascent stage, the HNWI population in China has increased dramatically, reaching 700,000 by the end of 2012. In addition, the total AUM in Chinese private banks was 573.6 billion yuan in 2008, but is over 2 trillion yuan today. With this growing trend, we see the huge potential in the wealth management sector in the near future.

China’s large banks also see this opportunity and are focusing more and more on wealth management. The wealth management business does not only bring significant intermediate business income, but also provides an opportunity for organisations to re-structure their retail banking business. This has become especially important as it appears that regulators are finally going to reform interest rates. More flexible interest rates will mean that banks will face increased competition and be able to rely less and less on traditional spread income – this is where higher margin wealth management products and services can help.

Nevertheless, Chinese banks still need a long time to build trust with their customers. In western countries, many private banks already have more than a hundred years of history. Will Chinese banks accomplish the same in less than 90 years?   

 

Total Customers

Customer Growth Rate

AUM (Billion RMB)

Minimum Amount (Million RMB)

BOC

40000+

-

450

8

ABC

35000

12.90%

396

8

ICBC

26000+

18.18%

473.2

8

CCB

-

18.82%

-

10

CMB

19518

18.34%

434.2

10

Source: Bank Annual Reports, 2013 

According to the figures from the Securities Association of China, the assets under management and revenue earned by Chinese securities companies asset management businesses has grown dramatically from the 1h 2011 to the 1h 2013. The total AUM in the 1h 2013 is about 13.75 times of the figure in the 1h 2011, which reflects the thriving of client asset management business of securities companies in China.

One reason for that for the dramatic expansion is the demand from clients. As China has a growing number of high-net-worth individuals and the investment options are relatively narrow compared to western countries, asset management business provided by local securities companies are thought to be a good choice. Market analysts estimated that the figures will keep growing exponentially for the following few years; at least the current market is far below saturation. 

 

Client asset management business of Chinese securities companies CNYbn

 

1h 2011

2h 2011

1h 2012

2h 2012

1h 2013

Revenue earned by securities companies

0.898

1.215

1.044

1.632

2.88

Total AUM

248.673

281.868

480.207

1890

3420

 

Source: Securities Association of China, 2011-2013

The US Federal Reserve (Fed) announcement that it will continue the program of quantitative easing (QE) boosted the Asian stock market, but many now worry that this is only a temporary fix.

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.

 

Increasing number of institutional investors in Shanghai A-share market

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