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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

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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

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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

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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

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