alan yau director, institutional client management · alan yau director, institutional client...
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Accessing onshore China Alan Yau
Director, Institutional Client Management
Non contractual document only intended for professional investors as defined by MiFID
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Old Chinese proverb:
“When out of doors, never show your silver”
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Investing in China What is all the fuss about?
The global investor search for yield
China has been the global growth driver, even over the period of the recent financial crisis
China’s currency not fully convertible – acceleration on RMB internationalisation
This will pave the way for increased access into China’s financial markets and new investment
opportunities
Paving the way for access into China’s onshore financial markets
and new investment opportunities
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The need for internationalisation of the RMB Why?
Source: HSBC Bank.
1 A global
trading
currency
2 A global
investment
currency
3 A global
reserve
currency
Playing catch-up – Increasing share of world trade
– Trade settlements in RMB increasing - Current Account liberalisation
– Mismatch between size of economy and currency usage
Three main reasons for the wider use of the RMB
China’s new found confidence and growing world confidence in China – Increasing will to open up financial markets to international investors
– RMB internationalisation facilitates opening up of domestic markets – global index
inclusion?
– Setting up RMB Centres in Hong Kong, Singapore, Taiwan, UK
China looking to diversify from USD as currency of trade – USD liquidity squeeze during financial crisis – Chinese companies using USD came
to a standstill.
– PBoC stepped in with swap lines with central banks to offer RMB trade liquidity
– China wish to see RMB feature more in FX Reserves – risk of USD depreciation
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Traditional way to acquire exposure to China assets Go “offshore”
Source: HSBC Bank.
Equity markets – Via listings in offshore exchanges eg Hong Kong: “H” shares, Red Chips, etc
– Number of stocks listed are limited in number eg “H” share listing represented by c.100 stocks
Fixed income – Via Dimsum market or hard currency issues
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Why Invest in onshore China? Preparing for the future
1. Well capitalised stock markets
– Onshore China (A and B share) capitalisation c.USD3.5 trillion (Sep2013) cf. UK, Japan
– Represented by over 2,400 company stocks
– exposure to sectors undergoing “industrial upgrading”
2. China fixed income
– RMB 29.6 trillion (USD5 trillion approx.) capitalisation
– Deep bond market for growing international investor base
Source: HSBC Bank.
China’s financial markets are sizeable
and a source of new investment opportunities
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Accessing onshore China Key milestones of China market deregulation
Source: CSRC, SAFE.
1992
2003
2005
2006
2007
2009
2010
2011
2012
2013
B-share market opened to foreign investors
A-share market opened to foreign investors under QFII scheme, with an initial quota of USD4 billion
QFII quota increased to USD10 billion
CSRC revised QFII rules and relaxed the eligibility criteria for long-term funds
QFII quota increased to USD30 billion
Domestic institutions allowed to invest overseas under QDII scheme
SAFE relaxed QFII FX control rules
China inter-bank bond market opened to foreign investors under CIBM scheme
QFII allowed to trade index futures
RQFII scheme launched, first batch being bond funds with total quota of RMB20 billion
QFII quota increased to USD80 billion, and approval cycle shortened from 18 months to an average of 6 months
CSRC and SAFE further revised QFII rules to relax controls and provide more flexibility
RQFII scheme extended to A-share ETF funds, quota increased to RMB270 billion
CIBM scheme extended to foreign insurance companies
QDLP rules promulgated in Shanghai, allowing foreign hedge fund managers to raise funds in China and invest overseas
CSRC Chairman Guo announced QFII/RQFII quotas to be expanded by 9/10 times and considered to pilot-launch the QDII2 program, the Qualified Domestic "Individual" Investors
RQFII is extended to cover all financial institutions in HK with the asset allocation restrictions removed and repatriation rule confirmed
PBOC released official circular to allow QFIIs to participate in CIBM
Hong Kong/Macau/Taiwan residents living onshore in China allowed to invest into A-share and domestic securities investment funds
Foreign residents living onshore in China allowed to invest into domestic securities investment funds
Foreign banks allowed to provide custody service for domestic funds
QFII quota increased to USD150 billion
RQFII Scheme further expanded to Singapore(RMB50 billion) and London(RMB80 billion), Taiwan (pending)
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Accessing onshore China Access requirements
Capital control to access onshore markets
Three schemes open to investors:
1. QFII: Qualified Foreign Institutional Investors
2. RQFII: Renminbi Qualified Foreign Institutional Investors
3. CIBM: China Interbank Bond Market (limits to certain investors types eg central banks etc)
An investor licence is required to tap China’s financial markets
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Accessing onshore China Option 1: QFII scheme
Total approved QFIIs (as of 30 Nov 2013): 251
Total approved quota/available quota (as of 27 Dec 2013): USD49.7bn/USD100.3bn
Advise to seek advice and help with an experienced
Custodian bank in handling QFII application and
documentation
Qualified Foreign Institutional Investor (QFII) scheme
Applicable
institutions
Overseas asset managers, insurance companies, securities companies, commercial banks, others
(pension fund, charity fund, endowment fund, trust, government investment institution)
Source funding Foreign Currency (converted to RMB onshore before investment commences)
Available
instruments
Exchange-listed or transferred A-shares, bonds and warrants
Fixed income products traded in inter-bank bond market
Securities investment funds
Index futures
Subscription to IPO, additional issuance, rights issues, and convertible bond issuance
Asset allocation No less than 50% in equity and no more than 20% in cash
Foreign ownership limit 10% for individual foreign investor; 30% for all foreign investors
12 15 7
18 24
18 12 29
72
45 1 700 1 775 2 100
3 400 950
3 398 3 347 3 050 1 920
15 803 12 258
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Number of Newly Approved Institutions
QFII market development (2003-2013)
Asset management (62.15%)
Insurance firm (6.37%)
Securities firm (3.59%)
Bank (13.15%)
Others (14.74%)
Breakdown by number of QFIIs
Source: CSRC, SAFE.
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Accessing onshore China Option 1: QFII scheme
QFII eligibility criteria
Type of institution
Track record and
operational
experience Assets under management
Paid in
capital
Ranking in
world
Asset Management 2 years or more Not less than USD500 million in securities assets in the last
financial year N/A N/A
Insurance companies 2 years or more Not less than USD500 million in securities assets in the last
financial year N/A N/A
Securities companies 5 years or more
Not less than USD500 million in net assets and not less than
USD5 billion in securities assets in the last financial year N/A N/A
Commercial banks 10 years or more Not less than USD300 million in tier one capital and not less
than USD5 billion in securities assets in the last financial year N/A N/A
Others (pension fund, charity
fund, endowment fund, trust
company, government
investment institution)
2 years or more Not less than USD500 million in securities assets in the last
financial year N/A N/A
Note: Only investors domiciled in countries or regions where the securities regulatory authorities have signed a Memorandum of Understanding with the CSRC are eligible to apply for QFII status.
On 27 July 2012, the CSRC officially released the revised 'Circular on Relevant Issues Concerning Implementation of the Measures on the Administration of the Domestic Securities Investment of Qualified Foreign
Institutional Investors' (the '2012 CSRC circular').
Source: CSRC, SAFE.
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Accessing onshore China Option 1: QFII scheme application process
Source: CSRC, SAFE.
CDC: Central Depository Company
SCH : Shanghai Stock Exchange
CFETS : China Foreign Exchange Trade System
CSRC
SAFE
CIBM
PBOC SHH
CSDCC
SSE
PBOC
PBOC
SHH
CFETS
CDC SCH
(optional¹)
N Y
Obtain Investment License
Obtain Investment Quota and
Approval to open RMB account
Apply for trading code with
interbank trading center
(CFETS)
Obtain quota approval to invest
in CIBM
Set up RMB account for CIBM
Open bond account with CDC,
SCH and filing with PBOC
QFII Starts Trading in Stock Exchange
QFII Starts Trading in CIBM
Interbank bond market
Apply for the Investor ID at
CSDCC SHH and SZN
Report to Shanghai and
Shenzhen Stock Exchange
Apply for opening of RMB
account for securities
investment
Custodian
Exchange market
QFII
Application
documents
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Accessing onshore China Option 2: RQFII scheme RMB Qualified Foreign Institutional Investor (RQFII) scheme
Applicable institutions
Hong Kong, UK, Singapore, and Taiwan subsidiaries of domestic fund management companies, securities companies, commercial
banks, insurance companies, or Financial institutions registered and having its principal place of business in the respective RQFII
countries
Obtained asset management licence issued by the respective securities regulator in country of RQFII centre and have already
conducted relevant asset management business.
Source funding Offshore RMB
Available instruments
Exchange-listed or transferred A-shares, bonds and warrants
Fixed income products traded in interbank bond market
Securities investment funds Index futures
Subscription to IPO, additional issuance, rights issues, and convertible bond issuance
Other CSRC-approved financial instruments
Asset allocation On 6 Mar 2013, restrictions on asset allocation was removed ie Quota can be invested 100% bonds, equities etc
Foreign ownership
limit 10% for individual foreign investor; 30% for all foreign investors
270
100
80
50
TBC
0 50 100 150 200 250 300
Hong Kong
Taiwan
London
Singapore
Paris
Allocated RQFII Quota in RMB (billion)
Source: CSRC, SAFE.
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Accessing onshore China Option 2: RQFII scheme application process
Source: CSRC, SAFE.
CSRC
SAFE
CIBM
PBOC
SHH
CSDCC
SSE
PBOC
PBOC
SHH
CFETS
CDC SCH
(optional¹)
N Y
RQFII Starts Trading in CIBM
Custodian
RQFII
Taiwan
Obtain Investment License
Obtain Investment Quota and
Approval to open RMB account
Apply for trading code with
interbank trading center
(CFETS)
Obtain quota approval to invest
in CIBM
Set up RMB account for CIBM
Open bond account with CDC,
SCH and filing with PBOC
Interbank bond market
Apply for the Investor ID at
CSDCC SHH and SZN
Report to Shanghai and
Shenzhen Stock Exchange
Apply for opening of RMB
account for securities
investment
Exchange market
RQFII Starts Trading in Stock Exchange
Application
documents
Hong Kong
London
Singapore
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Accessing onshore China Option 3: CIBM scheme
Source: CSRC, SAFE.
Number of foreign institutions approved under the
CIBM scheme (as of 26 Dec 2013): 105
Among them, 68 are foreign banks, 11 are foreign
insurance companies, 21 are RQFIIs and 5 is QFII
China Interbank Bond Market (CIBM) scheme
Applicable
institutions
Type 1: Foreign central banks or monetary
authorities
Type 2: RMB clearing banks in Hong Kong
SAR and Macau SAR
Type 3: Overseas participating financial
institutions engaging in RMB cross-border
settlement
Type 4: Foreign insurance companies (since
March 2012)
Type 5: QFIIs and RQFIIs
Source
funding
RMB (generated from central bank
reserve/currency swap, cross-border trading or
RMB investment business or premium from
RMB insurance products)
Available
instruments
Fixed Income instruments in interbank market –
Government bonds, PBOC bills, financial bonds,
commercial paper and mid-term notes, etc
Banks (65%)
Insurance Companies (10%)
RQFIIs (20%)
QFII (5%)
Breakdown by number of institutions
Note: The number does not include foreign central banks and monetary authorities as this is not publicly disclosed, the number is the total foreign institutions which are allowed to participate in CIBM market including those under CIBM scheme as well as RQFII scheme.
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Who can invest? And what can be invested in?
Asset class Market Market size (USDbn) Who can invest?
RMB Equity A-share market 3,393 QFIIs
RQFIIs
RMB Fixed Income China interbank bond market
(CIBM)
4,448 QFIIs
RQFIIs
Central banks
RMB clearing/settlement banks
Supranational institutions
Foreign insurance companies
Exchange traded bond market 261 QFIIs
RQFIIs
Note: For those institutions having on-shore subsidiaries or JVs, they actually have the option to invest through their onshore subsidiaries/JVs.
Source: CDC as of 30 Jun 2013; SCH as of 1 Jul 2013 and CSDCC as of 30 Jun 2013.
Source: HSBC Bank.
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Comparison between QFII and RQFII
Differences between schemes relate to
(i) asset allocation (ii) liquidity (iii) quota increase
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Products and solutions: Offshore RMB versus onshore RMB
Offshore RMB products1 Onshore RMB products (China)2
Payments and cash
management
No restriction on account opening No restriction on account opening
Custody/fund admin RMB Custody and Funds Administration Services RMB Custody and Clearing (QFII only)
Exchange services
and risk management
products
Spot FX (for trade/general purposes)
Deliverable FX Forward, FX Option and FX Swap
Deliverable Interest Rate Swap, Cross Currency
Swap and Interest Rate Swaptions
Non Deliverable Forward
Non Deliverable Option
Spot FX (QFII only)
Forward FX (QFII only)
FX swaps (QFII only)
Interest Rate Swap and Cross Currency Swap (QFII only)
Credit Risk Mitigation Agreement/Warrant (QFII only)
FX options (QFII only)
Borrowing/financing
products
Trade financing facilities and commercial loans
Issuance of offshore RMB bonds/certificate of
deposits (CDs)
Trade financing facilities and commercial loans (QFII
only)
Money Market (QFII only)
Investment products Time deposit, CDs
Primary and secondary RMB bonds trading
FX linked structured deposit
Interest rate linked structured deposit
Equity linked structured deposit
Gold linked structured deposit
RMB investment funds
RMB equities
RMB RQFII funds
RMB gold ETF
Time deposit (QFII only)
Call deposit (QFII only)
Structured deposit (QFII only)
Bonds (QFII and CIBM)
Onshore RMB money market funds
RMB mutual funds (equity fund, bond fund and MMF)
Notes:
1. Representative offshore RMB products currently available in Hong Kong.
Products may vary in other regions.
2. There are certain restrictions on the types of clients to which the products can be
offered.
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CIBM, QFII and RQFII – A cautionary note on taxation
Note: Since there is no standard practice of tax collection in the market, you may want to seek your own professional tax advice from your tax adviser.
SAT - State Administration of Taxation in China.
Please seek specialist tax advice before proceeding!
Exchange market Withholding tax, subject to 10% income tax
– Coupon Interest – Coupon Interest of Government Bond (issued by MOF) is tax exempted – Stock/Cash Dividends – Deposit Interest (including interest from RMB cash balance, Clearing Reserve Fund, Warrant Collateral Fund)
Business tax – Coupon interest are subject to business tax but currently, they are not collected as there are variances among the different tax authorities
Capital gains tax – Capital gains tax is not collected as the SAT is yet to announce the rule regarding the capital gain tax
Interbank bond market Withholding tax, subject to 10% income tax
– Coupon Interest
– Coupon Interest of Government Bond (issued by MOF) is tax exempted
– Currently no standard tax withholding practice is adopted by the bond issuers
– Deposit Interest
Business tax
– Coupon interest are subject to business tax but currently, they are not collected as there are variances among the different tax authorities
Capital gains tax
– Capital gains tax is not collected as the SAT is yet to announce the rule regarding the capital gain tax
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Important information
This presentation is distributed by HSBC Global Asset Management (France) and is only intended for professional investors as defined by MiFID.
It is incomplete without the oral briefing provided by the representatives of HSBC Global Asset Management (France). The information contained herein is subject to change
without notice. All non-authorised reproduction or use of this commentary and analysis will be the responsibility of the user and will be likely to lead to legal proceedings. This
document has no contractual value and is not by any means intended as a solicitation, nor a recommendation for the purchase or sale of any financial instrument in any
jurisdiction in which such an offer is not lawful. The commentary and analysis presented in this document reflect the opinion of HSBC Global Asset Management on the markets,
according to the information available to date. They do not constitute any kind of commitment from HSBC Global Asset Management (France). Consequently, HSBC Global
Asset Management (France) will not be held responsible for any investment or disinvestment decision taken on the basis of the commentary and/or analysis in this document.
All data come from HSBC Global Asset Management unless otherwise specified. Any third party information has been obtained from sources we believe to be reliable, but which
we have not independently verified. Representative overview of the investment process, which may differ by product, client mandate or market conditions.
Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. HSBC Global Asset Management (France) accepts no liability for any failure
to meet such forecast, projection or target.
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Non contractual document, updated in January 2014