Market compass for China The coming wave of globalisation
The People s Republic of China An exceptional set of records For the past two decades, China s economy has reshaped the world with double digit growth year after year. In October 2014, the IMF announced that China was the world s largest economy by purchasing power parity ( PPP takes into account the relative cost of local goods, services and inflation rates of the country). China is now: the largest manufacturing economy the largest exporter and second largest importer of goods and the world s largest holder of foreign currencies reserves (Source: IMF) After growth rates averaging 10% over the past 30 years, China is entering into a slower growth period. Real GDP growth should be between 6.5% and 7% in 2015. The Chinese government, having recently completed its Central Economic Work Conference, reinforced the need to maintain stable economic growth. Monetary and fiscal policies are in place to support stable growth and controlled inflation. In parallel, drivers of the economic development are being rebalanced, relying less on foreign demand. Innovation and urbanisation are changing the economy together with the liberalisation of the Renminbi. At a glance Population 1994 $ 1.20 bn Gross Domestic Product 1994 GDP 583 bn Population 2014 Gross Domestic Product 2014 $ 1.38 bn GDP 10,380 bn GDP PER CAPITA NEARLY $8,000 (Source: IMF) Sovereign risk rating: AA- Standard & Poors with a stable outlook 2
Liberalising financial markets Beginning 10 years ago, the Chinese authorities progressively implemented new policies to liberalise the country s financial markets. They increased the liquidity of Chinese mainland markets (Shanghai and Shenzhen) by facilitating foreign investments in securities (A-share market). In parallel, they internationalised the Renminbi in order to address the massive FX reserves, reduce reliance on the US dollar and reduce foreign exchange risk of the exchanged goods and services. The second largest equity market in the world In 2014, the aggregate capitalisation of the three Chinese Stock Exchanges ranked second after the New York Stock Exchange (NYSE) with a total capitalisation of USD8,179 bn and 4,310 listed companies. $133 bn Shenzhen (SZSE) $314 bn Shanghai (SSE) $862 bn Hong Kong (HKEx) $1,955 bn Shenzhen (SZSE) Worldwide ranking 9th $2,960 bn Shanghai (SSE) Worldwide ranking 7th $3,264 bn Hong Kong (HKEx) Worldwide ranking 6th 2004 capitalisation A total of $1,309 bn 2014 capitalisation A total of $8,179 bn (Source: World Federation of Exchanges, October 2014) The Renminbi: from internationalisation to globalisation In December 2014, Renminbi (RMB) joined the top five most-used currencies (Source: Swift). Also known as RMB ISO trading code: CNY (Chinese Yuan) ISO trading code CNH for RMB circulating out of mainland China China has successfully undertaken a number of steps to internationalise its currency. In 2014, 23% of China trade was denominated in Renminbi. In addition, the Chinese authorities launched multiple investment schemes to further liberalise the currency such as QDII, QFII and RQFII schemes. Offshore centres were set up first in Hong Kong then progressively in Taipei, Singapore, South Korea. In 2014, they expanded to Canada and Europe (United Kingdom, France, Germany, Luxembourg). 3
In 2015, China picked up the pace and requested the inclusion of the Yuan in the International Monetary Fund s in-house currency basket. This should ensure formal international recognition of the currency and lead to a more balanced, multipolar currency system. There are challenges as China still keeps a tight grip on the Yuan s value and the opening of Chinese capital accounts has only begun. The final decision will depend on the IMF board s appreciation on the Yuan convertibility or free usage. However, the role of the Renminbi in the future international monetary system will become increasingly prominent. According to the PBoC (People s Bank of China), the RMB is now used by almost 60 central banks and sovereign wealth funds for their global investments. Furthermore, the European Central Bank is in discussions to add the Renminbi to its foreign currency reserve while the Bank of England issued the first RMB-denominated government bond in October 2014. Gradual opening-up to foreign investors: from offshore to onshore investments In 2002 the first QFII scheme was established to enable foreign investors to invest in mainland China. QFII rules have been gradually relaxed and total investment quotas have increased from USD 4 bn in 2002 up to USD 150 bn. Less than ten years later, Chinese authorities introduced the RQFII scheme which had an initial investment quota of RMB 20 bn. In November 2014, the launch of the Shanghai-Hong Kong Stock Connect took place. It was a decisive step which complements existing QFII and RQFII schemes with further developments for the medium and long term. The Shanghai-Hong Kong Stock Connect is a mutual market access scheme giving Hong Kong institutional investors and mainland China retail investors access to each other s stock markets via their brokers. Among other new processes, the Stock Connect quota applies to the whole market and no longer just at institution level. Restrictions, such as lock-up period and repatriation rules, have been lifted. Further steps should reinforce Stock Connect: mainland mutual funds have been allowed since March 2015 to invest in Hong Kong shares via Stock Connect. Qualified foreign institutional investors (QFII): Regulation entered into affect in 2002. Foreign investors may invest in A shares, bonds, and warrants, interbank bonds market, securities investment funds and other instruments permitted by China Securities Regulatory Commission (CSRC) 275 overseas institutions have been granted a licence for a global quota of USD 67 bn. Currency: USD or other main currencies (Source: SAFE, December 2014) Renminbi qualified foreign institutional investors (RQFII) from Hong Kong, Taiwan, Singapore, the United Kingdom, Regulation put in place 2011 99 institutions have been granted a licence for a total of RMB 305 bn quota so far. Currency: RMB (January 2015) CHINA Hong Kong Qualified domestic institutional investors (QDII): Chinese domestic institutional investors who want to invest overseas. Regulation put in place in 2006 129 Chinese financial institutions for USD 82 bn (January 2015) RQDII (RMB qualified domestic institutional investors): Chinese individual investors who want to invest overseas Chinese domestic insurance companies who want to invest overseas. Regulation put in place in 2012 Qualified domestic investment enterprise (QDIE): Regulation put in place in March 2015 Four firms can now sell overseas alternative funds (private equity, hedge funds and real assets) 4 Shanghai Hong Kong StockConnect 100 direct and 60 indirect trading participants. Some limitations: limited aggregate holding volumes, limited daily trading turnaround, some risks with post trade process Funds/investors going into China Funds/investors going out of China
Market infrastructure Regulators in China The onshore regulatory environment can be quite complex to navigate and one must be aware of the constraints of operating under the supervision of the Chinese authorities. REGULATORS IN CHINA MARKET PARTICIPANTS Banks (branch, locally incorporated banks); Trusts China Banking Regulatory Commission (CBRC) Insurance and reinsurance companies INDUSTRY REGULATORS China Insurance Regulatory Commission (CIRC) Security firms and asset managers The three regulators provide licensing and approve new product launches in the industry CENTRAL BANK China Securities Regulatory Commission (CSRC) The People s Bank of China (PBoC) regulates money market, control and licensing of the RMB market National Association of Financial Market Institutional Investors (NAFMII) regulates China s over-the-counter market under PBoC supervision State Administration of Foreign Exchange (SAFE) regulates all FX market and administers FX system (Source: BNP Paribas) Post-trade infrastructure The Chinese market has a sound infrastructure for efficient settlement and custody arrangements. The China Securities Depository and Clearing Corporation Limited (CSDC) has two branches one in Shanghai (CSDC Shanghai Branch) the other in Shenzhen (CSDC Shenzhen Branch) They both provide depositary, clearing and settlement services for equities, investment funds and bonds listed on the Shanghai Stock Exchange and the Shenzhen Stock Exchange respectively. CSDC Shenzhen also provides clearing and settlement services for delisted shares on the OTC market in Shenzhen. CSDC acts as central counterparty for exchange-traded securities. There is no real time payment system for domestic transfers between banks (inter-bank) All securities are dematerialised. A-shares are settled in RMB through designated settlement banks. Settlement of A shares is on T+0 at 6.00pm while related cash is settled on T+1 at 4.00pm. 5
Further developments in the upcoming months Chinese authorities are keeping the pace with more market liberalisation. The markets expect: the expansion of the Stock Connect programme to Shenzhen-Hong Kong exchange link the harmonisation of QFII and RQFII rules the CIPS (China International Payment System) with Swift standard in November 2015 Cross-border distribution: a new global playing field On one side, today s Chinese asset managers are looking to expand their business and to diversify their client base beyond their domestic and regional borders. Chinese managers are taking advantage of the RQFII scheme through the Ucits (Undertakings for Collective Investment in Transferable Securities) vehicle to access investors in multiple jurisdictions. The key success criteria will include finding the right partner with a carefully designed operating model. On the other side, until very recently, distributing funds to Chinese investors has been challenging for non-domestic asset managers. The QDII scheme has been unfortunately ill-timed with its introduction in 2007 just before the global financial downturn and Chinese investors have posted sharp losses. In 2015, Chinese authorities will define the China-Hong Kong Mutual recognition Scheme which should allow Hong Kong funds to be marketed in China and vice-versa. However, Chinese investors demand for foreign investments remains low and the real potential of this platform is not yet certain. Find out more Video on Economic growth in China, slowdown and rebalancing (BNP Paribas Economic research, February 2015) http://bit.ly/chinagrow Monthly Renminbi newsletter on Securities Services website: http://bit.ly/rmbdisc Rising in the East: opportunities for cross-border distribution into Europe through RQFII Ucits funds http://bit.ly/eastrise Articles on Securities Services website New route to China: Asia teams offer more for clients with integrated brokercustodian solution on Northbound trading link from Hong Kong to Shanghai (February 2015) http://bit.ly/chinaroute Shanghai-Hong Kong Stock Connect is a Breakthrough for Direct Access to China Stocks : http://bit.ly/chinastock Fortune hunters: The explosive rise of e-commerce in China is revolutionising the country s financial services. Hugo Cox reckons European fund managers might do well to take note (November 2014) http://bit.ly/chinahunt The great war of China: Demand for water in China means huge investments and tighter regulations are needed (November 2014) http://bit.ly/chinagreat Market Information database on NeoLink, our client s portal, which brings in-depth information on market practices BNP Paribas websites in China: http://www.bnpparibas.com.cn/en/ and Hong Kong http://www.bnpparibas.com.hk/en/ 6
Your support in China and Hong Kong BNP Paribas Securities Services brings you the global reach, financial strength and breadth of expertise of BNP Paribas Group while providing support in the local time zone with local language and local market expertise. Securities Services delivers customised front to back office securities solutions to asset managers, institutional investors, issuers and financial intermediaries from offices in Hong Kong and China. We also support you locally in Singapore, Japan, China, India, Australia and New Zealand. We deliver a number of innovative solutions to institutional investors, banks and broker-dealers including: Brokerage execution Clearing, settlement and custody and full back-office in the box solutions Seamless access to Stock Connect via an integrated broker-custodian solution Full off-shore Renminbi and Hong Kong dollar capabilities End-to-end service model for setting up RQFII and QFII funds Enhanced distribution reach via BNP Paribas SIF/QIF fund service model We are well positioned with our award-winning innovative propositions to enable clients to fully capitalise on the fast developing opportunities in the region. Asia Asset Management Best of the Best Awards 2014: Best Specialist Custodian in Asia-Pacific Global Custodian Agent Banks in Major Markets Survey 2014: Highest local market scores in Hong Kong 2014 Global Investor Sub Custody survey: First place in Hong Kong The Trade Asia 2014: Best customer support 7
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