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China: Update on Shanghai FTZ Financial Reform

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.

Many reform details 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 the financial history of China.

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.

In-depth report on Shanghai FTZ are available here.

Source: Kapronasia, 05.06.2014

For more news and insights into Chinas Financial markets please visit www.kapronasia.com

Filed under: China, News, Risk Management, , , , , ,

Private banking in China finally taking hold

Considered one of the best retail banks in China, China Merchant Bank (CMB) has started their private banking business in 2007. At the end of 2012, CMB’s pre-tax profit from their private banking business reached 2.3 billion yuan. Other major banks in China have similarly increased their wealth management profit since 2010, when growth of the market really accelerated.

ICBC and BOC still have the largest private banking AUM among the top 5 while CMB has the most private banking centers to serve its HNWI customers. The high net worth customer segment (over 10M RMB in investable assets) is growing at 18% growth rate and reached to 700,000 by the end of 2012. It seems that banks have finally cracked the code and wealth management is set to grow in China.

Potential of private banking

Up coming Webinar on Banking and Risk Management in China on August 7th, 2013.

Source: KapronAsia, 18.07.2013

Filed under: Banking, China, Wealth Management, , , , , , ,

Greater China Exchanges: Hong Kong, Shanghai and Shenzhen Stock Exchanges set up joint venture

Hong Kong Exchanges and Clearing Limited (HKEx), Shanghai Stock Exchange (SHSE) and Shenzhen Stock Exchange (SZSE) signed an agreement today (Thursday) to establish a joint venture (JV) in Hong Kong with an aim to develop financial products and related services.  The three exchanges hope this new venture will help promote the development of China’s capital markets, enhance the competitiveness of these markets and promote the internationalisation of the three bourses.

 The principal business of the JV will include, but not be limited to, the development and franchising of index-linked and other equity derivatives products; the compilation of cross-border indices based on products traded on the three markets; and the development of industry classification for listed companies, information standards and information products.  They will also include market promotion, customer services, technical services and infrastructure development.

Initially, the JV will develop a series of cross-border indices on which a family of index products will be introduced.  This series of indices will include a benchmark cross-border index comprising large Mainland enterprises listed on HKEx’s wholly-owned subsidiary.  The Stock Exchange of Hong Kong Limited, SHSE and SZSE, and two indices based on this cross-border index – an index comprising A-share constituents and an index comprising Hong Kong market constituents.  The index products will include equity index futures and options based on these indices and they will be traded on HKEx’s derivatives market.

The JV’s nine-member board will be comprised of three directors nominated by each of the exchanges.  SHZE and SZSE will each nominate a Joint Chairman from their representatives on the board.  HKEx will nominate the Chief Executive from its designated directors.

The JV will have an initial paid-up capital of $300 million, with HKEx, SHSE and SZSE each contributing $100 million.  The three exchanges will have equal shareholding interest in the JV.  The exchanges aim to establish the JV within three months from the execution of the agreement.

“Building on the many well-established ties among the three exchanges, the new venture will provide a new platform for our cooperation and we hope that it will contribute to the further development of Hong Kong and the Mainland’s capital markets,” said HKEx Chief Executive Charles Li.

“As China continues to open up and the RMB gradually internationalises, it is inevitable we will have to compete in the international capital market.  Our efforts to further cooperation with HKEx and develop products for the offshore market will bring about a win-win situation for both Hong Kong and the Mainland,” said SHSE President Zhang Yujun.

“The establishment of the JV will help increase foreign investors’ exposure to the Mainland market via Hong Kong.  In addition, the JV can help raise the Mainland capital market’s influence in offshore markets and provide opportunities to explore opening up measures,” said SZSE President and CEO Song Liping.

Source: Mondovisone, 28.06.2012

Filed under: Asia, China, Exchanges, Hong Kong, , , , , , , , , , ,

China QFII quota increase April 2012

International asset managers are preparing to apply for the expanded quotas for China’s qualified foreign institutional investor (QFII) scheme and its renminbi-denominated equivalent (RQFII), but the opening will benefit only some.

Last week the China Securities Regulatory Commission (CSRC) said it would increase the total quota for the QFII scheme to $80 billion from $30 billion. At the same time, it released a second batch of RQFII quotas of Rmb50 billion ($7.92 billion), which will be used for A-share exchange-traded funds (ETFs) listed in Hong Kong.

“Even though the additional $50 billion QFII quota and Rmb50 billion under RQFII are not significant amounts for the A-share market, they still have a positive impact,” says Shenzhen-based Da Cheng Fund Management.

Unlike the first batch of RQFII quotas (Rmb20 billion released last December), which were shared by 21 Hong Kong subsidiaries of Chinese fund managers and securities firms, the second batch will only be granted to a few experienced managers.

“We have been preparing for this product for many months and we are confident we will be one of the managers to get the RQFII ETF quota,” says Michelle Chua, regional head of business development at Harvest Global Investors, the international arm of Beijing-based Harvest Fund Management.

The existing A-share ETFs offered in Hong Kong are mostly synthetic (swaps-based) products, but RQFII will broaden the range of physically backed products.

The new ETFs will directly invest in A-shares, explains Chua, so that “there will be no counterparty risk, no p-note [participation note] cost and no foreign exchange difference, as the ETF currency denomination [in renminbi] is the same as [that of] the underlying investments”.

Harvest FMC and Huatai Pinebridge were the two managers that jointly launched the CSI 300 ETF, the first cross-market ETF tracking stocks listed on both the Shanghai and Shenzhen exchanges.

The CSRC will take the RQFII pilot scheme to the next level by expanding its scale, allowing more types of financial institutions to participate and more flexibility in terms of asset allocation.

For the QFII scheme, the previous ceiling was lifted from $10 billion to $30 billion in 2007 after the China-US Strategic Economic Dialogue took place. The increase of $50 billion this time is hailed by local media as “unprecedented”.

Since the QFII scheme commenced in 2003, the CSRC has granted licences to 158 foreign financial institutions from 23 countries and regions. They include 82 asset managers, 11 insurance firms, 23 commercial banks, 13 securities companies and 29 other institutions, such as sovereign wealth funds, pension funds and endowment funds.

The CSRC says 129 out of the 158 qualifiers have obtained a total of $24.5 billion in QFII quotas. As of March 23, 74.5% of the assets in the QFII accounts were invested in the domestic stock market, 13.7% in bonds and 9.6 % in bank deposits. The total holding of QFIIs counts for 1.09% of the market capitalisation of domestic A-shares.

Z-Ben Advisors views the latest changes as “unambiguous signals of China’s intent to attract more offshore investors and a sign that market investments will play a key role in the government’s plan to internationalise the Rmb”.

The Shanghai-based consultancy suggests that, in the short term, asset managers in the QFII application queue should expect accelerated approvals.

Regulators have already upped the pace of approvals since the end of last year. In March, the State Administration of Foreign Exchange granted a record $2.11 billion of quotas to 15 companies, compared with a total quota of $1.87 billion handed out during 2011.

“The QFII programme enhances our experience of monitoring cross-border securities investment and capital flows,” the CSRC says. “The QFIIs, mainly overseas long-term value investors, have diversified the domestic investor structure, upgraded the quality of listed companies and promoted the international recognition of domestic capital markets.”

Source: Asian Investor, 10.04.2012

Filed under: China, News, , , , , , , , , , , , ,

China may abolish QFII within five years, says Harvest

It’s likely to be scrapped to make way for a ‘free-market investing scheme’ en route to capital controls being fully lifted in the next decade, says Harvest Global Investment’s Mao Shuguang.

There have been a lot of renminbi-market developments in the last two years, particularly the past three months, noted Eric Chow, deputy head of business development at HSBC, this week.

But asset managers – speaking at the ‘RMB Rising’ conference run by AsianInvestor and FinanceAsia in Hong Kong this week – are still waiting for further clarification on issues such as RMB usage and conversion.

“Since July we’ve been seeking info about conversion limitations, what RMB funds can be used for,” said Chow. “At the moment, our choices are quite limited. So in the short term the situation is quite challenging.”

As for the kind of products fund managers are likely to launch, mainland firm Harvest Fund Management is waiting for the regulator to publish further details on how RMB usage and repatriation will work.

Mao Shuguang, head of product management at Harvest Global Investments (the Beijing based fund-management company’s Hong Kong branch), notes the huge interest in accessing the RMB market.

The firm’s focus will be on retail funds, he adds, and demand has been high for expected quotas to invest in A-shares via RMB-denominated ‘mini-QFII’. Mao cites an increase of Rmb30 billion in renminbi deposits in August, as reported by the Hong Kong Monetary Authority.

The government is getting more serious about the issue, he adds, citing for instance that the People’s Bank of China now has a department focused on the internationalisation of the renminbi.

“But it can’t be done in a day,” he says. “Capital controls need to be freed up so that money can flow into and out of China.”

One major development en route to greater relaxation of capital and investment controls is that the qualified foreign institutional investor regime is likely to be replaced by a “free-market investing scheme”, says Mao. In principal, it will allow the free flow of inbound investments, but there will be restrictions.

It will be probably three-to-five years before the QFII regime switches to the new set-up, suggests Mao, although investment restrictions will continue to ease before then.

Meanwhile, “at some point we can expect full free flow of capital”, he says, but not for 10 years or so – and some say it will take as long as 20 or 30 years.

Asked how he thought things would pan out in the shorter term, Mao turned his attention specifically to the mini-QFII regime, the rules of which have yet to be published. The industry had expected these to come this year, but now the consensus is for spring 2011.

Mao questioned the term ‘mini-QFII’, suggesting a better title would be ‘QOCII’ – the qualified overseas China institutional investor scheme – because under the rules, overseas institutional investors will be able to facilitate investments of offshore RMB deposits back into mainland capital markets.

Source: Asian Investor, 28.10.2010

Filed under: Banking, China, News, Services, Trading Technology, , , , , , , , ,

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