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Option the Dragon: Stock Options set for launch in China

On August 6, 2013, Chinese securities companies received ‘the notice of preparing the initiating stock options full simulating trading works’ sent by the Shanghai Stock Exchange. This information implies that SHSE is already fully prepared for the launching of stock options. Although there is no clear timetable for launching the stock options, it is likely that they will appear in Chinese capital markets in 2013 or 2014.

Exchange traded stock options are new to Chinese capital markets and these derivatives provide a number of benefits. For one, both long and short-term trading are accessible and, similar to other derivatives such as futures, t+0 is allowed. Another benefit, which is an advantage over futures, is that leverage is provided but buyers can only lose the amount that they paid for the option. Options traders can also execute more complicated strategies through the combination of buying and selling call and put options, including straddles and spreads. Moreover, stock options are perfect hedging tools for individual stocks. Currently, Chinese stock index futures can only hedge the risks of the CSI 300 index and can not directly hedge non-systematic risks from individual stock options. And, despite providing leverage, security companies charge high transaction fees and interest rates for customers interested in selling short and buying long. Furthermore, the introduction of stock options comes with a high minimum threshold, which may largely change the structure of investors in the stock market by increasing the proportion of institutional investors. Thus the introduction of stock options may largely change the landscape of Chinese stock markets and may stimulate trading volumes.

However, there are also potential problems and doubts from the public that my come with the introduction of Chinese stock options. One issue regards the minimum threshold for investors of stock options. Some market analysts estimate that this threshold could be as high as one million yuan, which is higher than thresholds for index futures and securities lending services from securities companies. Currently, only 1% of accounts in the stock market can meet this requirement. Critics argue that stock options may serve as a tool to short the market by institutional investors and rich individuals, who may be in a disadvantaged position. But there are also analysts stating that the threshold may be lower, which would give normal individual investors a better opportunity to participate. The minimum threshold will depend on the final decision from CSRC.

Another problem has to do with the underlying stock that stock options are based upon. Currently, it seems as though only very large blue chip listed companies can enjoy stock options, so not all stocks can be optioned. Because large-cap stocks fluctuate less dramatically than small-cap and medium-cap stocks, the meaning of stock options may not be as transparent as in the fully opened western markets. But for institutional investors like mutual funds, as large-cap stocks take larger proportions of their shares, stock options may be an ideal hedging tool for stabilizing the performance of their portfolios. As current stock markets have adopted t+0 and t+1 trading, short-term day trade for hedging is not feasible. Thus traders may either choose longer-term hedging strategies or speculate through high-frequency intra-day trading.

Furthermore, large amounts of speculation in stock options may lead to dramatic fluctuations in stock prices. Similar to trades within A-share markets, the cost of short-selling is much higher than longing the stocks. So under the current unbalanced system, both hedgers and speculators may choose short in the stock options and the performance of A-share markets in the future may weaken. This has already been proven from the stock index future’s impact on A-share stock markets.

In conclusion, despite the risks, the launching of stock options is important for the development of Chinese capital markets.

Source: KapronAsia, 20.08.2013

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

China relaxes QFII rules to attract overseas investment

BEIJING — China has eased its grip on its control on investments made by qualified foreign institutional investors (QFIIs), according to a revised QFII regulation released by the nation’s securities regulator.

Compared with previous rules, the regulation published by the China Securities Regulatory Commission (CSRC) on July 27 lowers the QFII threshold and allows QFIIs to invest in the nation’s capital market through more than one securities dealer.

The regulation also allows QFIIs to invest in the interbank bond market and private placement bonds issued by small and medium-sized enterprises and hold up to a 30% stake in a listed company, up from the previous 20% stake cap.

The move aims to make it easier for QFIIs to invest in China’s capital market, part of the nation’s efforts to free up capital flows and accelerate the opening of domestic capital markets.

 The CSRC said it received 28 submissions after opening draft rules to solicit public opinion from June 20 to July 5, and the commission has made adjustments accordingly.

The CSRC said it will continue to speed up the approval of QFIIs, facilitate the operation of the QFII scheme with related authorities and strengthen supervision to attract more long-term overseas investments.

            The CSRC has quickened QFII approvals lately, granting 5.62 billion U.S. dollars in quotas to 51 QFIIs since December 2011.

The State Council, China’s Cabinet, in April increased total QFII quotas to 80 billion U.S. dollars from the previous 30 billion U.S. dollars.

The CSRC has granted QFII licenses to 172 foreign investors since the program started in 2002.

Foreign investment under the QFII program accounts for 1.1 % of the total market value of the country’s A-shares. (CM)

Source: China Money, Xinhua News, Citic NewEdge, 28.07.2012

Filed under: China, Services, , , ,

China Insight: QDII Program Overview and Technical Challenges; More Bank Reforms to come? – KapronAsia

Reform in China’s Banking Sector: More to come?

In recent years, Chinese banking sector profits have skyrocketed to new levels, in part due to the Beijing imposed ceiling on the rates banks pay depositors, providing banks with a source of cheap funds, which banks then in turn lend out at much higher rates. Net profits for commercial banks grew 36 percent last year, reaching 1 trillion Renminbi. Chinese banks are enjoying year-on-year rises of more than 30 percent in their first-half net profits. In one example, the Industrial and Commercial Bank of China’s fees and commission income for the year 2011 was close to 100 billion RMB, compared to 72 billion in 2010 and 55 billion in 2009.

The Technical Challenges for QDII Funds in 2012

Since the first QDII quota of US$500 million was allocated to the HuaAn fund in 2006, the quota allocated to security companies and fund companies has maintained steady growth. As of the end of February 2012, US$44.4 billion of investment quota was allocated to fund companies and security companies, compared to US$44.4 billion and US$40.6 billion for 2011 and 2010.

Overview of the QDII Program in 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.

Disaster Recovery for Chinese Banks
In recent years, since Chinese banks have been working on data consolidation at the national level, the establishment of disaster recovery systems has become one of the key considerations for banks. Today, banks must ensure the stability and security of their national data center in the event of a disaster to ensure uninterrupted business operation through disaster recovery systems.

Source: KapronAsia, 15.05.2012

Filed under: China, Risk Management, Trading Technology, , , , , , , ,

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 Insight: QDII updates, Disparated Financial Standards and new Market Reforms – KapronAsia

Overview of the QDII Program in 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.

China’s Disparate Financial Standards

China’s financial standardization lags behind the relatively rapid development of the financial industry globally and has yet to meet the demands of technology innovation and business expansion. This can slow the pace of technology advancement as competing standards add layers of complexity and make it more difficult to come up with straightforward technology solutions to clients’ problems. The PBOC has realized that financial standardization does and will continue to play a pivotal role in financial informationization and regards standardization work as an important strategic measure to promote China’s financial industry.

Further Reform of China’s Stock Markets in 2012
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.

Source: KapronAsia, 10.04.2012

Filed under: China, Exchanges, Standards, , , , , , , , , ,

Shanghai Stock Exchange takes on HFT speculators, amongst other global exchanges

The Shanghai Stock Exchange (SSE) has become the latest bourse to signal a crackdown on the huge number of messages high-frequency traders generate.

Having carried out research into trader speculation and its effect on the market, the Chinese exchange operator has vowed to take on the issue with “both technique and system”.The SSE will impose trading limits on accounts “with such abnormal trading behaviors as making orders in a large sum or at high prices, or conducting frequent false orders and withdrawals”.Firms that continue to break the new rules will be designated unqualified investors, facing trading restrictions for several days and referral to the China Securities Regulatory Commission.

Yesterday US operators Nasdaq OMX and Direct Edge outlined plans to fine high-frequency traders for carrying out too many cancelled orders, following a path already taken in Europe by Deutsche Börse and Borsa Italiana.

The Shanghai bourse and its rival Shenzhen Stock Exchange have also both moved to curb excessive speculation and volatility in shares in newly listed companies. New rules mean there will be a 30 minute suspension on shares that rise or fall by 10% from their opening prices on their first day of trading.

Filed under: Asia, China, Exchanges, Risk Management, , , , , , , , ,

China:Exchanges and Trading Houses Face Overhaul by Government

Electronic trading houses, which conduct transactions in commodities, artifacts and precious metals, have seen their numbers grow in the past five years from a few dozen to more than 300.

But the boom could come to an abrupt end as the government pursues a drive against risky practices in the industry.  This week, the State Council determined that these legal and illegal trading houses are too risky to be left unregulated. The council called on the China Securities Regulatory Commission (CSRC) to “clear them up”.

Rules bar the trading houses from making markets and adopting centralized pricing and say that no more than 200 investors may hold stakes in any single traded asset. Investors are also banned from reselling an asset within five days. Although the government said that some of the trading houses’ activities are illegal, it didn’t specify which transactions are involved.

This isn’t the first time that the government has found fault with the trading houses. In 2009, the State Administration for Industry and Commerce “banned” the establishment of new trading houses, and last year, the Ministry of Commerce and five other ministries issued regulations on securitized trade houses.

But this latest move is a more serious threat to the trading houses. First, it is being initiated at a higher level, by the State Council. Second, the government is using the phrase “clear up and reorganize”, not “regulate” – meaning that some trading houses might have to close.

Hantang Artworks Exchange was one of the first trading houses to react. In a statement on Tuesday, the exchange said it will stop using centralized pricing and limit participants’ trading frequency.

Fei Jian, chairman of Shanghai Agricultural Products E-Business Co Ltd, a trading platform for agricultural products, said his business is in full compliance with the rules and welcomes the cleanup.  “We made changes early in 2009 to comply with the regulations. Having the sector regulated is good for everyone,” he said.

The scale of the trading houses’ business isn’t known. The houses aren’t required to disclose transaction data. Additionally, their fast growth and the fact that some of their activities are illegal make it difficult to calculate the industry’s size.

The trading houses pose risks, with an absence of clearinghouses, ever-changing trading rules and price manipulation.

But investors’ collective intelligence is unlikely to have ignored or missed these risks. Thus, some experts said, if regulators really want to establish financial stability, they need to figure out what needs the exchanges fulfill.

Hu Yuyue, head of Beijing Technology and Business University’s securities and futures research center, said the answer can be summed up in one word: demand.

Hu said many trading houses have sprung up because investors need more financial tools than are being provided by the major, approved futures exchanges, such as the Shanghai Futures Exchange, Zhengzhou Commodity Exchange and China Financial Futures Exchange.

“The futures exchanges in China are well-regulated but relatively underdeveloped. So they lack new products and systems to satisfy investor demand,” he said. “That has resulted in the boom of unregulated trading houses.”  In the first 10 months of this year alone, 58 trading houses were established.

Three bourses were set up in the city of Wuhan in just a week: the Wuhan Shipping Exchange, the Wuhan Financial Assets Exchange and the Wuhan Agricultural and Livestock Products Exchange.

One factor driving the formation of the new trading venues is the surge in liquidity caused by the 4 trillion yuan ($631 billion) stimulus package enacted in 2008 amid the global downturn.

The private-sector credit crunch has also driven capital into the trading houses, as some entrepreneurs abandon their businesses for the financial market.  Fei said that the trading houses do face a shake-up, but strong investor demand will keep the sector developing.

Source: China Daily, 25.11.2011

Filed under: Asia, China, Exchanges, Risk Management, , , , , ,

Chinese Markets STEP Forward with China FIX

Dr. Bai Shuo of the Shanghai Stock Exchange (SSE) explains the importance of the STEP Protocol and its development in China.

Dr. Bai Shuo, Shanghai Stock ExchangeHow did the STEP Protocol begin and which organisations originally developed it?

Back in 2003, at the same time when the SSE began to prepare the Next Generation Trading System (NGTS) project, which would later go live on Nov 23, 2009, the SSE decided to introduce a message-based protocol between the exchange and brokers, which is widely accepted to be FIX. The pioneering work was encouraged by the China Securities Regulatory Commission (CSRC).

Under the framework of national standardization, this protocol became one of the eight standards in the securities industry. The WG01 group was responsible for the drafting of the protocol under the direction of the CSRC. The membership of the WG01 group includes: SSE, Shenzhen Stock Exchange (SZSE), Shanghai Futures Exchange (SHFE), Guoxin Security Co. and some other securities companies. The protocol, which is informally called Chinese FIX, or CFIX, is named STEP (Securities Trading Exchange Protocol), as it is regarded as the initial ‘step’ towards a first-class stock market. STEP 1.0 was written in 2004 and issued in 2005. STEP was revised as version 1.1 in 2006.

How does STEP fit into China’s overall usage of standards in the financial world?

While FIX is a global standard in the securities industry, STEP is more suitable for the Chinese market, since STEP introduced many native business and local definitions. The CSRC is responsible for the STEP standard. The SSE has agreed to use STEP and is eager to promote STEP, so as to encourage brokers to follow STEP. In China, investor accounts that should be supervised are designed to be contained in Parties component block. Tags in range 8500 to 8540 are allocated for Chinese market usage, such as market data delivery and business for funds, warrants and voting. Quite a few tags are enhanced for local businesses, such as tag 40 (OrdType), tag 103 (OrdRejReason), tag 269 (MDEntryType), tag 326 (SecurityTradingStatus).

What is the scope of STEP’s usage? What parts of the trading cycle was it intended to cover and what asset classes is it used for?

STEP covers the pre-trade and trade parts of trading cycle, as well as some specific registering instructions. STEP is used for stocks, funds, bonds, warrants, ETFs, and lots of featured non-trading businesses, such as IPOs, right issuances, fund creation and redemptions, warrant executions, bond deposit and withdrawals, voting, etc.

Who were the early adopters of STEP? Who currently uses STEP and for what?

The SSE uses STEP for level2 market data service. Information vendors have taken STEP for level2 service in the meantime. Creative businesses like this are suitable to take the new protocol standard in order to have the ability to easily maintain and extend, without a burden to support a legacy interface.

What is the next stage in the development of STEP? Where is adoption of STEP going to grow most significantly in the near future? Are there new goals or applications for STEP?

STEP is under revision as many new businesses were introduced during the last five years. STEP is considered easier to be adopted in market data and other creative businesses. Also, STEP over FAST will be used for SSE level 1 market data delivery. Block trading, quote repo, agreed repo and margin financing on the Alternative Trading Platform (ATP) of the SSE will take STEP as the format for business records. Traditional trading business will gradually be enhanced to support STEP in near future as we get more confidence through the experience on creative business.

Source: FIXGlobalTrading, 15.09.2011
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Filed under: Asia, China, Exchanges, FIX Connectivity, Market Data, Trading Technology, , , , , , , , , , , , , , , , ,

CSRC outlines how funds can invest in CSI 300 futures

The regulator releases an early draft of the proposed rules for Chinese mutual funds that want to invest in CSI 300 index futures.

s fund analysts and managers continue to attend futures training courses organised by the China Securities Regulatory Commission, a draft of the CSRC’s proposed rules on how Chinese mutual funds can invest in the upcoming CSI 300 index futures hit the industry’s email inboxes earlier this week.

The regulator is encouraging discussion in the industry; it wants the public to provide feedback on the rules by this coming Monday, March 22.

A first glance through the five-page draft seen by AsianInvestor suggests the rules look straightforward, and its broad strokes read largely the same — both in language and spirit — to the rules for futures investing by fund managers in Taiwan. (This doesn’t come as a surprise; the regulations governing mutual-fund investments in securities, which went into effect in China in 2004, were also modelled after those in Taiwan.)

In the draft, the CSRC does not go into detail on how managers will qualify for futures-investing status. Fund houses, instead, are advised to review their fund prospectuses and contracts agreed with investors back at the fundraising stage and decide for themselves whether futures investing would meet their initial investment objective and risk exposure level as promised to investors.

For the fund industry, use of futures for the purpose of return enhancement is not permitted. The CSRC says the purpose of any fund activities in the futures market should be risk management.

The futures instruments for fund investment must be approved by and listed on China’s securities exchanges, and based on indices tracking only equity prices. (So notions of funds participating in bond futures or pretty much any other type of derivative would be futile at this stage.)

There are 559 mutual funds known to exist in China, according to the latest fund-registrar data tracking numbers published at the end of January. A quick search using the word ‘futures’ in Chinese in a fund database yields only 29 hits, in which ‘futures’ are specifically mentioned in the fund contracts or prospectuses as acceptable instruments for use by these funds.

Should these managers be willing to take up the challenge, they will theoretically be the initial 29 participants able to actually short A-shares domestically in China. (And there are 11 onshore brokerages authorised to serve them.)

Equity funds, balanced funds and principal-protected funds appear largely free to allocate to the CSRC’s approved list of futures instruments. The regulator thus far has made no mention on what it intends to do about segregated accounts and multi-client segregated-accounts, which went live in 2008 and 2009 respectively.

There will be limits on the holdings of futures by close-ended funds, open-ended index funds and exchange-traded funds. At the end of any given trading day, total value of securities held plus futures may not exceed 100% of a fund’s NAV — in short, leverage will not be permitted for these funds.

For open-ended funds, managers will be allowed to hold futures with a total outstanding value that exceeds 10% of the fund’s daily AUM at market closing. Net turnover of equity futures trading in a fund cannot exceed 20% of a fund’s NAV.

At the end of any given trading day, the total value of futures positions plus the value of the securities held in an open-ended fund may not exceed 95% of the fund’s NAV — with ‘securities’ defined as equities, bonds, options, asset-backed securities and repo instruments. Five percent of the fund’s assets must be allocated to liquidity instruments with maturities no longer than the equivalent of one-year government bonds.

Mindful that the funds industry at large is still poring over lecture notes and textbooks this month and that most firms have not yet hired the required techies for back-end support, the CSRC is advising caution and proper understanding; all participants should be adequately prepared before they enter the futures market. The CSRC wants fund houses to set up specific departments covering futures strategies and investments.

Other stakeholders, including guarantors to the ‘principal-protected’ funds (China’s version of CPPIs), are advised to get actively involved and aware of the potential value-at-risk for the funds they have given guarantee to; and that there should be sufficient assets to cover the principal-protected funds promised to investors should any potential losses occur.

Custodian banks are advised to review their own adequacy and strategies accordingly and develop risk-management and technological teams and platforms to support this development.

In earlier interviews with AsianInvestor, fund-rating agencies, including Morningstar and Lipper, have already taken a dim view of the opening moves that mutual fund houses will be able to make. Aside from the anticipated volatility to come, both predict a conservative and difficult early period, in which fund houses will be constrained by a lack of experienced staff and technical knowledge to draw on — for what is supposedly one of the most important chapters in the recent history of capital-market developments in China.

Nonetheless, for now, unregulated private funds, foreign investors with access to A-share markets and high-net-worth clients, and the 11 brokerages authorised to trade futures, are expected to be the largest beneficiaries.

For foreign players, though, CSI 300 futures will just be something to add to the toolbox. Overseas funds have long been able to express their views on A-shares using FTSE Xinhua A50 futures available in Hong Kong or Singapore.

Source:AsianInvestor.net, 18.03.2010 by By Liz Mak

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

China’s QDII ETFs … taken with a pinch of salt

Despite the fanfare from QDII ETF issuers and the Shanghai Stock Exchange, these products are unlikely to achieve the lofty aims set for them.

If Shanghai Stock Exchange’s general manager, Zhang Yujun, is to be believed, China’s new generation of exchange-traded funds under the qualified domestic institutional investor (QDII) scheme will be ready for launch shortly.

The Shanghai bourse is keen to put its hotly anticipated products onto the market as soon as possible. It has marked 2010 down as a year of innovation, with the number of domestic and overseas ETF launches potentially hitting 10 for this year.

But it’s not the domestic ETFs that industry execs in Shanghai or around the region are buzzing about, but the overseas ETFs the SSE is championing. Market players are wondering what the developments will mean for the QDII market and what China’s fund flows in the region will look like after these products are made available.

The names now lining up in the QDII ETF pipeline include: China Southern, with its planned launch of a S&P 500 tracker; Beijing-based China Asset Management, which is going with Hong Kong’s Hang Seng Index; Harvest Fund Management, the new proud owner of Deutsche Asset Management’s Asian investment platform, using the Dow Jones Industrial Average; Shanghai’s Fortune SGAM, which will soon see its foreign stake transferred to Société Générale’s alternatives arm, Lyxor, and whose ETF tracks the Topix Core 30; not to mention Huaan’s newly announced initiative to track the FTSE 100.

In one fell swoop, the SSE is making available assets from around the world. Investors in China, at the click of a trade, will be able to access asset classes from US and UK equities to regional Asian exposures and Hong Kong and Japanese stocks.

(The list above does not cover Guotai Fund Management, one of the earliest Chinese houses wanting to license an index for an overseas ETF, which recently realised it will not attract enough liquidity for a niche index such as the Nasdaq 100. It is now quietly calling its product an “index-tracking fund”, instead of an ETF. Nor does the list include Penghua Fund, whose high-profile announcement of its supposed deal to have contracted three MSCI Barra indices was never confirmed by MSCI.)

Zhang says the Shanghai bourse wants to play its part in ‘standardising’ asset management. Index-based products are easily understood by investors, and through the standardisation process, the SSE believes it will bring transparency and even discourage moral hazards among asset managers.

Better yet, since trading and management fees for ETF instruments are traditionally the lowest for products globally, the introduction of ETF competition into the Chinese market should help bring down the high fees usually seen in the active management sector. And the way Zhang sees it, passive and index-based investments will eventually outperform.

Yet all these laudable ambitions should be taken with a pinch of salt. Far from having developed ETFs that come up to expectations, the SSE’s versions of these products and the underlying mechanism are hardly on a par with developed-market ETFs.

In particular, sources say the SSE boss’s comments are meant for domestic consumption — the exchange has been publicly pressuring the China Securities Regulatory Commission (CSRC) into approving the ETF launches, which were planned to have happened as early as November last year.

Why the regulatory hesitation? The CSRC was an early champion of introducing more liquid and transparent ETFs to China. But the SSE has not resolved the multiple technical barriers limiting the listing of an efficient overseas product in the country, as is revealed by an early blueprint for the Harvest Dow tracker jointly designed by Harvest and the SSE, and made public by the exchange. The SSE has made compromises in the design and the trading mechanisms of these supposed ETFs.

Amid the fanfare created by the issuing fund houses and even the SSE itself, one key point appears to be overlooked. The unspoken truth is that since the bourse has failed to tackle the underlying issues, the planned ETFs could only trade on exchanges as closed-end funds and would largely fail to deliver the many benefits normally expected of genuine ETFs.

These products will face challenges from day one, including: time differences in settlement cycles between the SSE and the exchange of the underlying index’s traded market; the lag in trading hours between China and underlying securities; the limitations of China’s lack of market-making mechanisms, and its reliance on its unique arbitrage mechanisms for levelling ETF traded prices and net asset values; and China’s foreign exchange restrictions, which currently only allow for monthly repatriation of capital. All of which the SSE has acknowledged in its white paper on ETFs that is available to the public.

Bound by these limitations, these products will not be able, for example, to perform continuous creation of units like normal ETFs, unlike even the very same strategies traded in Hong Kong. The NAVs will be largely static during the trading hours in China, though the ETF prices will be subject to supply-demand swings. (Hong Kong’s platform is backed by market-makers, unlike Shanghai’s, which is highly sensitive to liquidity and the level of trading among arbitrageurs on underlying strategies.)

The question then becomes: will China ever attract enough interest among arbitrageurs to trade on these faraway markets without real-time information? After all, when China trades, the US and the UK markets will be largely closed. Even for markets that sit in Asian time zones and close at hours overlapping China’s, there will be time differences on the settlement cycles. Arbitrageurs, therefore, will have to trade by assuming and incurring all risks themselves.

For example, a Ping An Hong Kong subsidiary doesn’t trade on the books of Ping An’s mainland entity. Legal status still withstanding, they are very different entities. One unit south of the border going short, cannot be reconciled from an accounting perspective by a separate unit going long north of the border. So, from where and how will these arbitrageurs emerge?

Because of the many compromises the Shanghai bourse has made to fit QDII ETFs into the existing — but highly unique — domestic ETF mechanism, the forthcoming international instruments can largely only be ETFs in name but not substance. An even better way to understand them is actually to see them as the equivalent of ‘listed open funds’ or ‘Lofs’ — products peculiar to China.

Ultimately, QDII ETFs are no different from closed-end funds — so why the current fuss over them? Sources close to the Shanghai bourse’s advisory panel say there’s really no reason for it — they are just another group of products to add to China’s well stocked shelf.

Nonetheless, they offer a slightly better alternative to the many internally managed and largely cost-return-inefficient QDII active funds now available in the market. And the idea of ETFs from a marketing perspective will no doubt catch on.

But even the mere illusion of innovation in the QDII market may be a false dawn. Both active and passive QDII managers will continue to be plagued by domestic expectations of further renminbi appreciation and by the bad reputation of the first generation of QDII products still freshly and firmly fixed in the minds of Chinese investors.

To wit, E-fund — the second biggest Chinese fund house, no less — kicked off the year with a fundraising attempt of just $86.6 million for its first QDII product.

Source: AsianInvestors.net, 10.03.2010 by Liz Mak

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China: CSRC sets outs rules on CSI 300 margin trading

China’s top securities regulator on Friday unveiled regulations on the pilot programs for the soon to be launched margin trading and short selling business.

Securities firms must have at least 5 billion yuan in net assets and be rated as A-class in order to be qualified for the business. The regulator also required securities firms to have sufficient capital holdings and stocks of their own and have completed test runs of the trading network in order to conduct the business.

“We will gradually loosen the requirements and expand the pilot programs to more securities firms after the first batch of selected firms achieve successful results,” said an official from the China Securities Regulatory Commission (CSRC).

The regulator also asked qualified securities firms to choose clients carefully based on the review of their financial status, trading experience and risk preference. The purpose is to restrict investors with low risk tolerance and insufficient trading experience from the business, the CSRC official said.

In 2008, the CSRC picked 11 top brokerages for test runs of the trading network, including CITIC Securities, Haitong Securities, Guotai Junan, Shenyin Wanguo and Everbright Securities. It was reported that the CSRC would pick six to seven domestic brokerages from the 11 candidates for the initial phase of the trial program.

The CSRC did not reveal what stocks would be the target for margin trading and short Margin trading and short selling will allow investors to borrow money to buy securities or borrow securities to sell.

Once launched, the business is expected to account for 15 to 20 percent of the securities industry’s revenue, analysts said.

Source: http://www.sina.com/Citic-NewEdge, 26.01.2010

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China Index Futures get Regulatory approval

The government on Friday gave the green light for stock index futures, margin trading and short selling in a milestone move that ends the one-way trade in the capital market.

An official with the China Securities Regulatory Commission (CSRC) said on Friday that the State Council has approved stock index futures, short selling and margin trading “in principle”. The regulator said it would take three months to complete preparations for index futures.

The new tools would protect investors against losses and also help them to profit from any declines. Until now, Chinese investors could only profit from gains in equities.  Analysts said the announcements are unlikely to cause any sharp volatility in the A-share market next week as the rumors have already been factored in.  “The market is unlikely to see huge fluctuations next week as the introduction of new financial tools has been discussed for years,” said Zhang Qi, an analyst with Haitong Securities.
Index futures are essentially agreements to buy or sell an index at a preset value on an agreed date. Investors can also borrow money to buy securities or borrow securities to sell under the business of margin trading and short selling.

Zhang said the move would be positive for blue-chips and heavyweight stocks as the contract would be initially based on China’s CSI 300 Index that tracks the 300 biggest shares traded in Shanghai and Shenzhen.

“Index futures are expected to bolster the market value of blue-chips,” he said.  Large listed securities firms such as CITIC Securities and Haitong Securities will also
directly benefit from the new business and could see a surge in their revenues, Zhang said.  Analysts expect the new tools to improve liquidity by attracting more capital into the equity market as the government plans to cut back bank lending to 7.5 trillion yuan ($1.1 trillion) in 2010 from last year’s 9.21 trillion yuan.

China’s securities regulator has been considering the introduction of index futures since 2006 when Shanghai set up the China Financial Futures Exchange to prepare for the running of the new mechanism. The plan had been held up till now along with the proposals for margin trading and short selling.

In 2007, CSRC chairman Shang Fulin said that the infrastructure and regulations needed for index futures and margin trading are in place.  Institutional investors are expected to be the mainstay of the new business as the threshold is high for retail investors who are more vulnerable to potential risks, said analysts.

It is estimated that the trading of stock index futures will take about three months to set up. Investors will need to deposit a minimum of 500,000 yuan in order to open an account to trade in stock index futures.

China will select high-quality brokerages to launch the short selling and margin trading of stocks on a trial basis.

Source: Sohu.com/CITIC NewEdge, 08.01.2010 by Liang Haisan

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China Merchants receives QDII approval despite ING troubles

China Merchants Fund Management will test domestic appetite for global resources investments with a new fund, for which shareholder ING is a sub-advisor.

China Merchants Fund Management — a joint venture between China Merchants Bank, China Merchants Securities and ING Investment Management — has secured approval for a qualified domestic institutional investor (QDII) product.

The China Securities Regulatory Commission (CSRC) has approved the Shenzhen-based firm’s product plan to launch a global commodities fund, with ING IM as the sub-advisor. The Dutch firm will be responsible for supplying investment research and strategic and tactical asset-allocation advice to the fund. The product will most probably be structured as a fund-of-funds.

“Currently we have no resources fund or strategy into which this fund will invest,” says Edmund Lacis, regional head of wholesale and business development at ING IM in Hong Kong. “We will be leveraging our existing global knowledge and expertise to develop a new strategy for this fund.”

Grant Zhang, portfolio manager at China Merchants, tells AsianInvestor he will act as the fund’s manager. He started as a securities analyst at China Merchants Securities.

The QDII approval comes on the heels of a recent QDII fund launch by Guangzhou-based E-fund, which began fundraising for a self-managed Asian equity strategy on December 7. E-fund has yet to announce how much money it has attracted. Up next, Penghua has an $800 million quota for a manager-of-managers strategy with shareholder Eurizon Capital, while Changsheng has a $700 million quota for a pending Goldman Sachs-advised product.

Sources say Guotai also secured a $700 million quota for a tracker fund based on the Nasdaq 100 yesterday.

The State Administration of Foreign Exchange (Safe) only resumed quota handouts in October, after a 17-month hiatus.

The CSRC’s approval of China Merchants’ product plan has raised concerns among some industry observers. The green light has been given despite the uncertainty over ING IM’s future ownership due to the European Commission-mandated break-up of its parent. In October, ING was told to offload its investment and insurance businesses by 2013. Institutional investment consultants Watson Wyatt and Mercer have since withheld their ‘buy’ recommendations for the group for that reason.

Even before the ruling, ING had been seeking buyers for its businesses in Asia and the US, to raise funds to repay the bailout capital it has received from the Dutch state. In Asia, it has already sold off its Taiwanese insurance, Australian wealth management and Asia-wide private banking businesses.

In a Financial Times interview on December 21, new global chief investment officer Jan Straatman outlined a plan to break up ING’s 300-strong investment team in Europe into 14 different boutiques. These units will be organised by the asset classes they invest in. Straatman is quoted as saying that the same structure will be applied in the Asia-Pacific region and the Americas, despite admitting that he has not consulted local staff on the decision.

The plan appears to contradict previous goals set when ING Group split the investment management and real estate investment business from the main balance sheet and combined them to improve synergies by centralising back-office functions and combining sales roles. The firm is facing increasing difficulties in retaining talent.

These variables are viewed as a risk to the management of China Merchants’ fledgling QDII fund and to its future investors.

That said, an overseas commodities fund will be a novelty to investors on the QDII scene. China Merchants has a positive house view on the long-term global demand for commodities. Having gained CSRC approval, the next step for ING and China Merchants is to secure a foreign exchange quota from the State Administration of Foreign Exchange.

China Merchants’ move will mark a potential point of differentiation in the sector. Its global resources theme will be a first. Of the 10 existing QDII mutual funds in the market, the main asset types have been global equities, Hong Kong H-shares, red chips and Chinese concept stocks in Asian equities.

Moreover, the launch will be backed by the distribution prowess of China Merchants, China’s third largest brokerage. China Merchants Bank and China Merchants Securities are among the most successful private wealth management providers in penetrating the growing Chinese middle class. The bank went public in an IPO in 2006, followed by the securities arm last November.

Shanghai-based consultancy Z-Ben Advisors believes the group’s IPO last year has distracted it from the business of fund management. Based on assets under management, China Merchants’ ranking slipped 11 places from 18th in 2008 to 29th last year, with Rmb35.6 billion ($5.2 billion) in AUM as of December 31. This can be partially explained by the string of portfolio managers it lost last year, including You Hai, Hao Jianguo and Huang Shunxiang.

According to data from investment consultant Morningstar, of China Merchants’ 11-strong investment team, eight have been with the firm for less than three years, and four of those have less than one year of service. CIO Zhang Bing has been with the firm for about four years.

The most experienced person at China Merchants Fund, Yang Yi, does not manage funds. He has been there since 2003, but his expertise is only available to institutional investors or high-net-worth clients who have signed up to China Merchants’ segregated accounts.

Z-Ben Advisors analyst Zhang Haochuan expects demand for the new fund to be weak. China Merchants has freshly finished a round of sales totalling Rmb2.6 billion for its small- to medium-cap fund, so customers’ appetite for further China Merchants products may be subdued.

In addition, notes Zhang, Chinese investors don’t need to go offshore for commodity investments. “Unless there are additional derivatives involved, investors will probably get higher exposure by investing in local commodities companies,” he says. “They don’t hedge [their books] as much.”

Source:AsianInvestor.net, 07.01.2010 by Liz Mak

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

China: Thanks but no thanks: E Fund declines help on QDII debut

The Chinese fund house’s prospectus for its Asian equities product, slated for launch next week, indicates it will manage the fund without MOU partner State Street.

Guangzhou-based E Fund Management, the second-largest Chinese fund house in asset terms, is poised to launch its first QDII fund, by itself, rather than with a foreign sub-advisor.

The firm is set to launch an Asia-Pacific equities fund under China’s qualified domestic institutional investor programme on Monday, December 7. Despite having signed a memorandum of understanding last year with State Street Global Advisors, E Fund will manage the portfolio itself.

The firm’s investment management team is in Guangzhou but it also has an office in Hong Kong run by Zhang Xiaogang that is expected to play a role. Calls and e-mails to E Fund were not returned by press time.

Executives at investment firms in Hong Kong say Beijing-based Harvest Fund Management’s acquisition of the Asian equities platform of DWS, the retail arm of Deutsche Asset Management, was the watershed event. This proved the determination of China’s fund houses to manage their own overseas investment products.

ICBC Credit Suisse Fund Management has also decided to run its own QDII funds. E Fund is the first firm independent of any foreign partnership to do so.

Foreign executives downplay the notion that these moves are simply about fees, aware of cases such as China Southern Fund Management’s decision to discontinue a sub-advisory agreement with BNY Mellon Asset Management, which was partly based on fees. Rather they reflect the ambition among Chinese firms to build international expertise in house.

“These fund-management companies have been supported by foreign advisors for 10 years, in some cases, and they’ve learned a lot,” says one banking executive in Hong Kong.

A spokesperson at SSgA says the firm does not have a relationship with E Fund. The firm declined to discuss the terms in the MOU.

Peter Alexander, principal at Shanghai consultancy Z-Ben Advisors, says E Fund’s move should not be interpreted as part of a wholesale trend. Although the biggest Chinese firms are keen to control their own products, the majority are probably not ready to follow suit.

Alexander says other QDII funds slated for launch early next year still look as though they will work with appointed foreign partners, including China Universal Fund Management (with Capital International) and Bosera Fund Management (with Singapore’s Fullerton).

But global asset managers that have written confident reports to headquarters regarding the QDII sub-advisory opportunity set may need to review the space, particularly if E Fund’s QDII product is rated a success, he warns.

The State Administration for Foreign Exchange has allocated $1 billion to the E Fund Enhanced Asia Pacific QDII Fund. Safe has also allocated QDII quota to Bosera, China Universal and China Merchants Fund Management, a joint venture involving ING Investment Management.

E Fund’s primary distributor in China is ICBC, which suggests little difficulty in attracting assets. Its QDII product will also be cheaper than its peers, charging 1.5% versus the 1.85% that has been charged for other QDII funds. Although called an Asian equities fund, it actually has a 60% ceiling on stocks, with a minimum 40% in cash or bonds. The Hong Kong market is expected to play a big role in the portfolio.

The QDII launch comes on the heels of E Fund’s successful launch of an exchange-traded fund, which raked in $2.8 billion last week. The firm was ranked 54th in AsianInvestor magazine’s rankings of fund houses by assets sourced from Asia-Pacific clients (based on September figures; see our December edition); its recent exploits suggest it will have climbed a few more rungs.

See also

E-Fund (GF Securities) ETF raises $2.8 billion, as Bosera gets ETF approved

Source: AsianInvestor.net, 04.12.2009

Filed under: Asia, Banking, China, Hong Kong, News, Risk Management, Services, Wealth Management, , , , , , , , , , ,

E-Fund (GF Securities) ETF raises $2.8 billion, as Bosera gets ETF approved

The trend in China towards passive investing bodes well for both asset managers’ products.

China’s E-Fund Management closed capital-raising for its Shenzhen 100 ETF feeder fund last Friday, having attracted a total of Rmb19 billion ($2.8 billion) in a month since October 28. Meanwhile, rival asset manager Bosera yesterday announced that it has received approval to launch a Shanghai mega-cap ETF and feeder fund.

As a result of the new inflows, E-Fund now ranks as the second-largest fund manager in China, with Bosera and Harvest dropping to third and fourth respectively, notes Shanghai-based financial consultancy Z-Ben Advisors. Zhang Haochuan, senior analyst at the firm, attributes the success of E-Fund’s products to “strong brand awareness and performance”.

However, Bosera may not prove quite as much of a hit, one fund manager told AsianInvestor, since it is launching a new ETF rather than setting up a feeder for an existing ETF. Lack of a track record will hurt the fundraising results, he says.

“Demand in China for funds remains firmly intact, if perhaps heavily skewed towards products with a passive investment style,” says Zhang. “And, for those fund managers with a following plus track record, demand can be significant.”

The consultancy feels it is no great surprise that E-Fund was able to attract so much demand, citing the “stunning” 101% return posted by the original E-Fund Shenzhen 100 ETF year-to-date. “Add this to the ability to tap into the bank channel for new inflows (which feeder funds are designed to do),” says Zhang, “and it makes considerable sense to launch fundraising on this scale.”

Moreover, not only was E-Fund’s new ETF launch the industry’s second largest for 2009, but the company can also claim the third-largest new launch, as the E-Fund CSI 300 Index Fund raised Rmb16.7 billion in August.

E-Fund’s success highlights the advantage of having direct access to fund flows from the banking channel, says Zhang. When issuing an ETF without a feeder fund, assets can only be raised either from direct sales initiatives or from securities firms.

To tap into China’s massive savings, fund managers must turn to the feeder fund, adds Zhang. Bank of Communications Schroders also recently demonstrated the benefits of this approach. The firm pulled in Rmb8 billion for its Shanghai 180 Corporate Governance ETF launch, nearly 90% of which came via the feeder fund.

Having completed the launch of the ETF feeder fund so quickly, E-Fund’s sales and marketing team can redirect their full attention towards its first qualified domestic institutional investment (QDII) product offering. With China’s State Administration of Foreign Exchange formally granting E-Fund $1 billion in quota in early October, E-Fund is ready to make its first offshore foray.

However, Z-Ben doesn’t expect QDII fund demand to be anything like it was in 2007, and fund managers’ QDII targets have become more modest as a consequence. E-Fund’s QDII product even includes a $1 billion quota maximum, thus limiting access and, perhaps, “turning up the heat on buyers”, says Zhang.

The consultancy had initially expected E-Fund’s QDII product to raise around $500 million at launch, with the quota balance to be applied to separately managed accounts. “Given the massive success of E-Fund’s feeder fund, however, a fast sell-out is now looking more possible,” says Zhang.

Source: AsianInvestor.net 01.12.2009

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