China Securities Regulatory Update July 2013

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1 Kreab Gavin Anderson is a leading communications consultancy with a global reach. We help our clients solve complicated and demanding communications issues that can have an impact on their futures. With operations in 25 countries and over 400 experienced consultants, we provide independent and strategic advice on high-stakes financial, corporate and public affairs communications. Our China Securities Regulatory Update offers a snapshot of the latest developments in China s securities and futures regulatory environment. Sources include the websites of China s financial regulators, securities and futures exchanges, and news releases published through local publications. For more information on China s regulatory landscape and how it may impact your business, contact us today. China Securities Regulatory Update July 2013 In July, major regulatory changes included the approval of a new free-trade zone in Shanghai (p. 2), the approval of a new government bond futures program (p. 2), the announcement of higher QFII and RQFII quotas (p. 4), Hong Kong s launching of Islamic bonds (p. 6), and an announcement of new high-level support for investment in small and micro enterprises (p. 6). 28 June: SCOPSR clarifies regulatory division of labor for private equity funds The State Commission Office for Public Sector Reform (SCOPSR), a Premier-led body that handles administrative reforms, has released a circular that clarifies the division of labor between the China Securities Regulatory Commission (CSRC) and the National Development and Reform Commission (NDRC) in regulating private equity funds. According to the circular, the CSRC is responsible for regulating private equity funds. The NDRC drafts and promotes policies for private fund development and sets standards for government investment. The circular also calls on the agencies to develop a mechanism for cooperation and information sharing. 1 July: Shanghai Exchange officially launches direct disclosure channel In April 2012, the Shanghai Exchange announced that it was preparing to roll out a direct disclosure channel through which listed enterprises could electronically disclose information on the exchange's website. The new disclosure system was designed to streamline regulation and reduce disclosure costs by putting in place a system where regulators would play a greater role post-disclosure. On 1 July, the system formally became operational. The exchange has announced that it will continue to monitor the direct disclosure channel while focusing on service, controlling risks, reacting rapidly and strictly punishing those who violate rules. 3 July: New Hong Kong association will promote wealth management development Chan Ka-keung, Hong Kong's Secretary for Financial Services and the Treasury, has told the Legislative Council that the government is supporting the establishment of a Private Wealth Management Association by market players towards the end of Contacts: Robyn Joseph Partner, Hong Kong rjoseph@kreabgavinanderson.com Thomas Patterson Executive Associate, Hong Kong tpatterson@kreabgavinanderson.com

2 The association will initially include authorized institutions and licensed corporations that offer private wealth management services. It will promote, assist and encourage the growth and development of Hong Kong's private wealth management industry and represent the industry on private wealth management related issues. The association will be a company limited by guarantee and will have no regulatory powers. The Securities and Futures Commission will continue to be the main regulatory body and distributor of licenses for related firms. 3 July: State Council approves Shanghai FTZ, with implications for banks and futures exchanges The State Council has approved a plan to set up a freetrade zone within Shanghai that will include the Waigaoqiao Bonded Area, the Airport Bonded Area and Yangshan Port. The zone is expected to become a testing ground for financial reforms. In the days following the approval, the media reported that foreign banks may be allowed to directly open wholly owned subsidiaries within the zone. They may also be permitted to set up joint-venture banks with mainland partners, and to own a majority stake. Within the zone, foreign commodities exchanges may also be allowed to set up their own futures delivery warehouses. This is expected to benefit major global exchanges who are looking to expand into China. 4 July: MOF announces expansion of local government bond issuance pilot According to a Ministry of Finance (MOF) announcement, the State Council has approved an expanded pilot program for local bond issuance. The previous version of the plan, approved in 2012, allowed only Guangdong Province, Jiangsu Province, and the cities of Shanghai and Shenzhen to issue bonds to raise money. The new plan adds the provinces of Shandong and Zhejiang to the list. The issuance of bonds by localities is restricted to quotas set by the State Council annually. Issued bonds are fixedinterest book-entry bonds, and only three-, five- and seven-year tenors are available this year. Bonds of one tenor cannot take up over 50 percent of the allotted bond quota. 4 July: State Council reportedly approves government bond futures re-launch The CSRC has posted a notice on its website that gives approval to the China Financial Futures Exchange (CFFEX) to re-launch government bond futures. The notice says the actual date of the re-launching will depend on two factors: The CSRC s approval of the related contract; and The CFFEX s judgment of market conditions and its own preparedness. In a separate notice, the CSRC said that the CFFEX had completed the design of the five-year government bond futures contracts. The re-launch may occur following the completion of about two months of preparatory work, including the development of a system for measuring investor suitability, clarification of market-entry rules for financial institutions, the opening of bond settlement accounts, the approval of contracts for five-year government bond futures, and the provision of instructions to intermediaries and investors. Government bond futures were withdrawn in 1995, following a case of excessive speculation by Shanghai Wanguo Securities. The re-launching indicates the CSRC s belief that market reforms related to the interest rate, the growth in the scale of the government bond market, the creation of a stronger market infrastructure, and improved regulatory and legal systems have made destabilizing events less likely. It also signifies the CSRC s interest in deepening financial market reforms and pushing forward capital market innovation. 2

3 5 July: CSRC opens consultation on unified investor suitability system for financial futures According to a CSRC notice, financial futures products are similar enough in terms of transaction mechanisms, settlement management and risk control that the development of a unified investor suitability system for all financial futures is possible. Therefore, the CSRC has released a draft that proposes expanding the scope of the existing trial investor suitability system for stock index futures to all financial futures. The current draft provisions: Change the title of the Provisions for the Establishment of an Investor Suitability System for Stock Index Futures (Trial Implementation) to the Provisions for the Establishment of an Investor Suitability System for Financial Futures ; Expand the scope of the provisions to the entire financial futures field, replacing all references to stock index futures with financial futures ; and Clarify the principle of aligning sales of appropriate products with appropriate investors, which forms the basis for the provisions. 8 July: CFFEX begins consultation process on government bond futures With the support of the CSRC, the CFFEX has called for input on its new five-year government bond futures contract. The futures contract stipulates that the bonds are nominal mid-term government bonds with a 1 million yuan face value and a coupon interest rate of 3 percent. On the first day of the delivery month, they must have a remaining term to maturity of four to seven years. In a single day, prices of the futures can fluctuate by up to 2 percent on either side of the par value, and the minimum transaction margin is 2 percent. Regarding the decision to launch only five-year futures, the exchange said that the decision was in line with the experience of international exchanges, which frequently trial futures by first launching one contract type that will appeal to the market. 12 July: Preferred stock pilot is forthcoming At a weekly press conference, a CSRC official said that, for some listed companies, the price of the firm's stock has fallen below the net asset value. To support the stock price, these firms would like to buy back shares, but they lack the capital to do so. The official said that the CSRC was currently preparing the necessary documentation for the launching of a preferred stock pilot program that would allow some firms to buy back common stock in the secondary market and issue preferred stock. This official s statement followed a 24 May announcement by the CSRC in which the regulator said it was investigating the use of preferred stock. 12 July: CSRC has no timetable for launching day trading According to a CSRC spokesperson, the regulator currently has no timetable for launching T+0 trading for A shares. Although a Securities Law prohibition on day trading was lifted in 2005, the official indicated that the CSRC requires additional time to examine day trading and make preparations in order to avoid any risks. The prohibition was put in place in 1999, four years after China s old day trading system was cancelled due to excess speculation. 12 July: Securities regulator supports inclusion of A- shares in international indexes In early July, the CSRC announced that it had been in talks with Morgan Stanley Capital International (MSCI) and other international index providers regarding the inclusion of A-shares in international indexes. On 12 July, a CSRC official offered the regulator's views on concerns that Qualified Foreign Institutional Investor (QFII) and Renminbi Qualified Foreign Institutional Investor (RQFII) quotas might impact the inclusion of A-shares in international indexes. 3

4 The official acknowledged that the inclusion of A-shares in indexes such as MSCI's emerging markets index would benefit investors. Additionally, the official expressed that the CSRC does not believe that QFII and RQFII quotas will negatively impact the inclusion of A-shares in international indexes because the CSRC raises the QFII and RQFII quotas based on the needs of investors. 12 July: QFII quota to rise, RQFII to be expanded abroad According to a CSRC spokesperson, the CSRC, the People's Bank of China, and the State Administration of Foreign Exchange have decided to raise the QFII quota to US$150 billion. The CSRC believes that this will help attract more long-term foreign investment and promote reforms and development in the capital market. The spokesperson also said that the RQFII scheme would be expanded so that firms from London, Singapore, Taiwan and other places could take part. This would benefit the development of the offshore yuan market. 12 July: CSRC issues new trading guidelines for public securities investment funds and securities companies Following the CSRC s decision to back the re-launching of government bond futures, the regulator has opened a consultation on two sets of new trading guidelines. The first set is for public securities investment funds that participate in government bond futures trading. The guidelines: Call for investment restrictions, such as a focus on hedging, in order to limit speculation; Call for differentiated regulation of different classes of fund products; Clarify the decision-making systems of fund management companies that take part in government bond futures trading; Guide fund management companies and custodian banks in prudential approaches to problems of funds that participate in government bond futures trading; and Strengthen the information disclosure work of funds that take part in government bond futures transactions. The second set of guidelines is for securities companies that take part in stock index futures and government bond futures trading. These guidelines are based on an earlier set of guidelines that covered stock index futures alone. They: Set new standards for the calculation of risk control indexes by securities companies that take part in government bond futures trading; Adjust the old guidelines to bring them in line with recent changes in regulation, deleting regulation of collective asset management plans with over 200 investors and an interdiction on the participation of special purpose vehicles in stock index futures; and Strengthen securities company risk management requirements in line with the special characteristics of government bond futures. 15 July: Upcoming support for small and micro enterprises revealed At a State Council-convened conference on small and micro enterprise financial services, CSRC Chairman Xiao Gang said that the CSRC is looking into measures on small and micro enterprise refinancing and on improving the listing prospects of such firms. Specifically, he mentioned three measures to help medium, small and micro enterprises and start-ups: 1. Improve start-up board entry standards and build a start-up board refinancing rule system; 2. Step up the roll-out of the National Equities Exchange and Quotations (NEEQ) SME share transfer system pilot nationally; and 3. Expand the scope of pilot measures for SMEs that issue private placement bonds to allow private bonds of unlisted SMEs to use the existing system. 4

5 Xiao Gang also said that the CSRC will push securities and futures companies to be innovative regarding the needs of small, medium and micro enterprises, such as by promoting asset management, direct investment, private bond underwriting, and asset securitization. At the same conference, Vice-Premier Ma Kai said that the CSRC, the PBC, the CBRC and other financial regulators should better support small and micro enterprises. He also called for the CSRC to move forward soon on refinancing for listed small and micro enterprises on the start-up board. 15 July: MOF, PBC and CSRC to support when-issued bond pilot The Ministry of Finance, the PBC and the CSRC have jointly announced to China s clearing houses, exchanges and bond underwriters and the National Interbank Funding Center that seven-year book-entry government bonds will be the first batch of bonds to be included in a when-issued bond pilot. Exchanges that meet qualifications can participate. When-issued bonds, whose issuance has been announced but not completed, are expected to help underwriters estimate turnover, reduce exposure risk, and promote more market-oriented pricing. 17 July: Legislative Council amends the Trustee Ordinance Hong Kong s Legislative Council has passed an amendment to the Hong Kong Trustee Ordinance, making the first changes to the law in nearly 80 years. The amendment formally imposes a statutory duty of care on trustees and gives them powers to appoint agents and custodians. The amendment also abolishes rules against perpetuities and excessive accumulations. This means that, after the law becomes effective on 1 December, new non-charitable trusts will not be limited in duration. 19 July: SAC standardizes cooperation in directional asset management between securities firms and banks The Securities Association of China (SAC) has issued a circular that specifies cooperation between securities companies and banks in directional asset management. The circular specifies forbidden behavior and qualifications for participating banks. Forbidden behavior includes: Independent development of the asset management business by subsidiaries and sales offices of securities companies, with the exception of subsidiaries of asset management companies; Capital pooling in directional asset management; Investment of entrusted capital in industries that are discouraged for investment under national regulations, such as highly polluting and high-energy-consuming industries; and Transfers of interest and commercial bribery. Regarding participating banks, the circular says securities firms should investigate banks asset quality, credit situation, management capability and risk control ability. Banks must have: A perfected corporate governance structure and effective internal controls; Assets of at least 30 billion yuan at the end of the most recent year and a capital adequacy ratio of at least 10 percent; No record of administrative penalties or punitive measures due to illegal activities in operational management in the past year; and No worsening asset situation or insolvency in the past year. The circular also stipulates content that should be included in contracts between securities companies and banks, calls on securities companies to improve their internal control mechanisms, and stipulates the duty of trustee institutions to responsibly manage entrusted assets. 5

6 19 July: Hong Kong permits sale of Islamic bonds On 19 July, legislation amending the Inland Revenue Ordinance and Stamp Duty Ordinance went into effect, providing a tax framework in Hong Kong for some types of Islamic bonds that is comparable to what investors in other bond products might confront. The amendments will give tax relief for transactions that underlie the issuance of Islamic bonds, which do not pay interest but involve payments of rent and dividends. Hong Kong s Financial Services and Treasury Bureau said that it hopes that this will help diversify the products that are available to investors in order to consolidate Hong Kong s role as an international financial center. 24 July: NDRC issues guiding opinions to promote investments in small and micro enterprises The NDRC has issued a set of guiding opinions that are intended to expand financing channels for small and micro enterprises and alleviate financing difficulties. The opinions are in line with a set of State Council guiding opinions, released earlier this month, on using the financial sector to support economic readjustment. The guiding opinions include calls to: Ensure mechanisms are in place for start-ups to take advantage of preferential tax policies in line with earlier regulations; Support funds used to attract start-ups and funnel social financing into start-ups; Support bond issuance by venture capital firms, equity investment firms, and industry investment funds, and their partners and limited shareholders, to cover investment in small and micro enterprises. Support investments by venture capital firms in strategic emerging industries; Encourage provincial NDRC offices to pair investors with small and micro enterprises; Simplify approval processes and increase the issuance of collective bonds by small and micro enterprises; Encourage funds raised through corporate bond issuance to support small and micro enterprise development; Support the use of funding to help small enterprises in industries with excess capacity reorient their production; and Standardize bank service fees and perfect fee pricing. 26 July: New rules on securities and futures trading terminals released The CSRC has issued new rules on trading terminals that are designed to protect investor rights and the safety of customers' assets, better resolve interrupted trading issues, and support the construction of a mechanism for online transaction identity authentication. The rules target areas that lack clarity in preexisting laws and regulations, refining and clarifying specifications and duties. Specifically, they specify the consumer information that should be collected by terminals, the recording method, time limits for saved data, and other technical issues. They also reemphasize the related duties of securities and futures firms: Proper management of terminals, including of the collection of correct, accurate and complete information; Protection of confidentiality; and A duty to report to regulators any incidents that could affect terminal information security. 26 July: CSRC may launch single-stock options pilot A CSRC spokesperson has announced that conditions in China are ripe for the launching of a single-stock options pilot program. Additionally, the spokesperson noted that targets for participation should have a large scale, good liquidity and moderate volatility in order to reduce their vulnerability to speculation and manipulation. The CSRC is currently conducting research into the pilot and will reveal more information at a later date. 6

7 28 July: Shenzhen Exchange issues new set of block trading rules The Shenzhen Stock Exchange has issued a new set of trading rules for block trading to account for changes that have occurred in China's capital market since the block trading system was set up in The new rules also clarify rules for same-day turnaround transactions of bond ETFs. The new rules: Lower thresholds for A-share, B-share and fund block trading to 60 percent of the original values; Introduce two new methods for setting prices apart from agreed pricing, including pricing based on the opening/settling price and pricing based on the volume-weighted average price; and Clarify conditions for same-day turnaround of bond ETFs. The threshold and bond ETF changes will take effect on 5 August. No timeline has yet been announced for the rollout of the additional pricing methods. 7