12 August 2016

Navigating China’s capital markets – Opportunities and trends

Panellists at the recent HSBC RMB Forum, staged in Kuala Lumpur, offered insights and thought-leadership on how best to capitalise on the opportunities China’s capital markets present to overseas investors.

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While China’s capital markets are among the largest globally, access for foreign investors remains restricted. Overseas entities are able to access the market through numerous investor programmes, however, knowledge gaps about how these schemes work – as well as how best to navigate its various asset classes – remain. Panellists at the recent HSBC Forum: RMB and China’s Global Future, staged in Kuala Lumpur, offered insights and thought-leadership on how best to capitalise on the opportunities China’s capital markets present to overseas investors.

Despite the recent volatility over the past few months, China’s capital markets remain among the world’s largest. Presently, the nation’s equity market stands at around US$8.5 trillion in market capitalisation, making it the second-largest globally behind the US. Similarly, China’s bond market is the world’s third-largest behind the US and Japan, and larger than those of the entire Eurozone , with more than US$6 billion in outstanding capital.

China also houses more than 300 million middle-class savers, a rapidly growing number of high net-worth individuals and more than 150 billionaires. While the facts and figures above point towards a vibrant market for overseas investment managers, state authorities continue to exert careful control over foreign access to China’s capital markets and domestic investors.

“The potential opportunities for Chinese investment, both inbound and outbound, are huge,” enthused Cian Burke, Global Head of Securities Services, HSBC. “Notwithstanding China is still a controlled market with foreign and local investors subject to quotas, its size and the potential for this to grow makes it simply too big to ignore,” he added.

Inbound quotas

Foreign investors seeking access to mainland assets are able to participate in numerous programmes. These include the Qualified Foreign Institutional Investor (QFII) programme and Renminbi (RMB) Qualified Foreign Institutional Investor (RQFII) programme, both of which allow overseas fund and securities management companies to purchase Chinese A-share equities from the Shanghai and Shenzhen stock exchanges, and RMB-denominated bonds and bond funds issued at China’s Exchange bond market. Participants in the RQFII initiative are also able to list RMB-denominated exchange-traded funds on some stock markets around the world, including those of London and Luxembourg.

Foreign central banks, monetary authorities, sovereign wealth funds, supras, clearing and settlement banks, cross board participating banks and insurance companies are entitled to make direct bond investments at the China Interbank Bond Market – the nation’s largest fixed income trading venue – where they are able to purchase a variety of products like government bonds, central bank notes and financial bonds. Overseas investors also have access to Chinese equities through the Shanghai-Hong Kong Stock Connect, a joint venture between the Shanghai Stock Exchange (SSE) and the Hong Kong Stock Exchange (HKSE). Launched in November 2014 and currently in its pilot phase, the programme provides offshore traders access to Chinese A-share cash equities listed on the SSE.

“The past few years have seen significant strides made by the Chinese authorities to open up the nation’s capital account to foreign participants,” said Jonathan Reoch, Director, Product Strategist for Asian Equities, BlackRock. “They also recognise that China is becoming a major deployer of capital overseas, and are introducing numerous mechanisms to allow the nation’s foreign exchange reserves and net savings pool to be invested abroad.”

Outbound flows

While the majority of Chinese investors seeking overseas opportunities have so far focused on real estate assets in places like London, Sydney and New York, Chinese players also have access to their own set of ‘Q’ initiatives. These include the Qualified Domestic Institutional Investor (QDII) programme, which allows a limited number of fund managers to purchase offshore securities; the Qualified Domestic Investment Enterprise (QDIE) initiative, which enables mainland companies to tap into a wider variety of foreign asset classes than those permitted by QDII; the Qualified Domestic Limited Partners (QDLP) scheme, where Shanghai-based private RMB funds can invest in offshore securities markets; and the upcoming Qualified Domestic Individual Investor (QDII2) initiative, which will allow wealthy individuals to invest in overseas capital markets. While yet to be officially launched by Chinese authorities, QDII2 will likely be rolled out later this year, according to forum panellists Ivy Zhang, Managing Director, Head of Fixed Income Trading, China, HSBC and Teoh Kok Lin, Founder and Chief Investment Officer, Singular Asset Management.

Mainland investors also have access to H-share equities listed on the HKSE by means of the Shanghai Hong Kong Stock Connect. However, to date capital flows in and out of China have weighed more towards foreign investors seeking mainland openings, rather than Chinese players seeking international opportunities. Forum panellists attribute this trend to the fact that around 80% of Chinese players are retail investors who likely do not have the knowledge or confidence to invest in foreign equities. They also attribute the Chinese government’s enthusiasm for foreign firms entering the mainland market as a means of China growing its domestic institutional investor base.

Overseas uptake

Irrespective of the numerous programmes currently available to international participants, uptake of these around the world – excluding Hong Kong – has been somewhat conservative. Panellists attribute this trend to two factors: first, that the various schemes are somewhat complex and require and in-depth understanding of an array of issues like asset ownership and trading conditions; and second, many of the rules overseeing these initiatives are continuously being updated, which for some investors are somewhat challenging to keep abreast of. Nonetheless, Chinese regulators are striving to make the investment landscape simpler and easier to navigate, with uptake of these various schemes by the overseas investment community growing.

“For some investors, the size and scale of China is daunting. There is an enormous amount of participants and the level of research that is required to enter the market is formidable,” explained Reoch. “While there will inevitably be challenges facing the market in future, the longer term journey is positive and confidence is nevertheless growing among overseas investors.”

Future growth

Panellists agreed that the end goal of China’s capital account liberalisation agenda is to facilitate a market free of investment restrictions. This will not only apply to foreign entities looking to capitalise on opportunities on the mainland, but also to Chinese players seeking openings abroad.

However, the liberalisation process will likely take many years to finalise and, in the meantime, it will probably involve the development of today’s various investor initiatives. For instance, the various ‘Q’ programmes will likely see their quotas expanded or indeed removed at some point soon. And, regarding the Shanghai-Hong Kong Stock Connect, discussions are already taking place among the initiative’s various stakeholders as to how the scheme can grow beyond A-share cash equities. This will probably include the rolling out of products featuring other asset classes – like derivatives, commodities and currencies – and the inclusion of listings from the Shenzhen Stock Exchange.

Malaysia will likely benefit from further liberalisation of investment flows. With bilateral trade between the two nations growing – currently China is Malaysia’s number-one trading partner; and Southeast Asia is China’s third-largest export destination behind the European Union and North America – so too will Malaysia’s liquidity pool of RMB increase, which in turn can be used to fund investment activities on the mainland.

“As the world’s largest trading nation and second-largest economy, the liberalisation of China’s capital markets will continue to present unrivalled opportunities for both domestic and international players, while granting overseas openings for mainland-based investors,” concluded Burke.

  1. These statistics were cited by Cian Burke, Global Head of Securities Services, HSBC, and Ivy Zhang, Managing Director, Head of Fixed Income Trading, China, HSBC.


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