investing in chinese capital markets

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Investing in Chinese Capital Markets

January 10, 2018


Stéphane KarolczukPartner, Head of Hong Kong OfficeArendt & Medernach

Florence LeeHead of China Sales & Business Development - EMEA HSBC Bank PLC

Allison Lovett – Moderator Vice President, Content ManagerNICSA


Access to China MarketHSBC Securities Services

Florence LeeHead of China Sales & Business Development - EMEA

HSBC Securities Services


China - Multiple Access Routes

Onshore

Access

Offshore

Access

(via HK)

Equity Bond

Stock Connect Bond Connect

QFII

RQFII

CIBM Direct

QFII - Qualified Foreign Institutional Investor

RQFII - RMB Qualified Foreign Institutional Investor

QFII

RQFII

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Expanded to 18 sites, with a total

RQFII quota of RMB1,740 billion.

HSBC is the only custodian that

serves investors in the13 out the 18

countries.

Total approved QFIIs is 310 as of end

November.

HSBC has 100% success rate in QFII

application and is awarded Best QFII

Custodian (2014-2017) Eligible stocks are

accessible through this

channel, covering all

China A-shares included

in the MSCI indices.

Northbound: total 10 HK

domiciled funds have

been approved for

distribution in China under

the MRF scheme

RQFII

Inbound

Investment

Bilateral

QFII

Stock

Connect

Mutual Fund

Recognition

Outbound

Investment

Qualified Domestic

Institutional

Investor

Global traditional

asset class, fund or

derivatives

Qualified Domestic

Limited Partnership

Overseas master

fund

QDII

QDLP

Third largest bond market in the world.

As of 03 November 2017, there are

20,772 investors participating in CIBM,

of which 755 are foreign institutions

and products.

CIBM

Access the CIBM market.

There are 210 registered investors as

of end November 2017.

Eventually will be a bilateral channel.

Bond Connect (north-trading link)

Cross-border Opportunities

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Onshore Market Structure

Source: HSBC

CSDCCCDC/SCH

CFETS

listing

Bond Issuers

SSE/SZSEBanks

Interbank Market OTC Market Exchange Market

Bond Investors

listing

SpotSpot/repo Spot/repoT+0

Source: HSBC, Bloomberg

China Bond MarketChina has the world’s 3rd largest bond market

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Offshore Hong Kong Mainland China

1. Bond Connect Company Limited, jointly owned by CFETS and HKEX, will support and assist admission and registration for Northbound investors, and liaise closely with the international Access Platforms under Bond Connect

International investors trade via global platforms with assets held in custody via a Hong Kong (CMU) nominee structure

Mainland regulators fulfil their requirements for transparency and control

Source: HKEx

International investors

Global

Custodian

Global

Access

Platforms

HKEX

CMU

Member

s

HKMA

CMU

CFETS

CFETS

Bond

Trading

System

CCDC + SHCH

Mainland dealers

BCCL1

Trading

Settlement

Trading Link

Settlement Link

Existing

interface

Existing

interface

Nominee structure

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China-Hong Kong Bond ConnectNorthbound Operating Model


Source: slide extracted from HKEX presentation6

China-Hong Kong Stock ConnectMarket Infrastructure – Connect with Shanghai and Shenzhen


Effective from 1 Mar 2017, China onshore bonds were included to two newly created indices

Tracking AUM ~USD 2 trillion

Potential to include CIBM into Global Aggregate Index

Bloomberg-Barclays Fixed Income Indices

Citi Fixed Income Indices

Effective in Feb 2018, China onshore bonds are included to existing and newly created indices

Tracking AUM ~USD 2 trillion

Potential to include CIBM into WGBI

JP Morgan Fixed Income Indices

China onshore bonds placed under review for inclusion in JPM’s fixed income indices

Possible inclusion in JPM Government Bond Index – Emerging Markets (GBI-EM) and other investment grade bond indices such as Emerging Market Bond Index (EMBI)

Tracking AUM ~USD 200 billion

Market estimated USD250+ billion of offshore deployment to China onshore bonds catalysed by index inclusion

Source: Market research reports, index providers, slide extracted from HKEX presentation

Last June, MSCI announced a 0.73% China A-share inclusion by two phases in May and August of 2018. This will include 222 Large Cap companies which are accessible through the two stock connect programmes.

The MSCI EMI is currently being tracked by cUSD1.6trn of global assets, about 15% of which are passive funds. (initial fund inflow c. USD 17.5bn).

Included China A-shares in its global benchmarks by launching two new transitional EM indices in May 2015.

Market estimated once 100% of A-shares are included over the next 5-10 years, foreign fund inflows to top cUSD500bn (cRMB3.5trn).

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MSCI

FTSE

Index InclusionChina-A shares and China bonds


This document is issued by HSBC Bank plc, Luxembourg Branch (“HSBC”). HSBC does not warrant that the contents of this document are accurate, sufficient or

relevant for the recipient’s purposes and HSBC gives no undertaking and is under no obligation to provide the recipient with access to any additional information

or to update all or any part of the contents of this document or to correct any inaccuracies in it which may become apparent. Receipt of this document in whole or

in part shall not constitute an offer, invitation or inducement to contract. The recipient is solely responsible for making its own independent appraisal of the

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Companies under number B-178455. HSBC Bank plc, Luxembourg Branch is regulated in Luxembourg by the Commission de Surveillance du Secteur Financier.

Copyright: HSBC Bank plc, Luxembourg Branch 2017. ALL RIGHTS RESERVED.

DisclaimerHSBC Bank Plc

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This document is issued by HSBC Bank plc (“HSBC”). HSBC is authorised by the Prudential Regulation Authority (“PRA”) and regulated by the Financial Conduct

Authority (“FCA”) and the Prudential Regulation Authority and is a member of the HSBC Group of companies (“HSBC Group”).

HSBC has based this document on information obtained from sources it believes to be reliable but which have not been independently verified. Any charts and

graphs included are from publicly available sources or proprietary data. Except in the case of fraudulent misrepresentation, no liability is accepted whatsoever for

any direct, indirect or consequential loss arising from the use of this document. HSBC is under no obligation to keep current the information in this document. You

are solely responsible for making your own independent appraisal of and investigations into the products, investments and transactions referred to in this document

and you should not rely on any information in this document as constituting investment advice. Neither HSBC nor any of its affiliates are responsible for providing

you with legal, tax or other specialist advice and you should make your own arrangements in respect of this accordingly. The issuance of and details contained in

this document, which is not for public circulation, does not constitute an offer or solicitation for, or advice that you should enter into, the purchase or sale of any

security, commodity or other investment product or investment agreement, or any other contract, agreement or structure whatsoever. This document is intended for

the use of clients who are professional clients or eligible counterparties under the rules of the FCA only and is not intended for retail clients. This document is

intended to be distributed in its entirety. Reproduction of this document, in whole or in part, or disclosure of any of its contents, without prior consent of HSBC or any

associate, is prohibited. Unless governing law permits otherwise, you must contact a HSBC Group member in your home jurisdiction if you wish to use HSBC Group

services in effecting a transaction in any investment mentioned in this document. Nothing herein excludes or restricts any duty or liability of HSBC to a customer

under the Financial Services and Markets Act 2000 or the rules of the FCA.

This presentation is a “financial promotion” within the scope of the rules of the FCA.

HSBC Bank plc

Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct

Authority and the Prudential Regulation Authority

Registered in England No. 14259

Registered Office: 8 Canada Square, London, E14 5HQ, United Kingdom

Member HSBC Group

DISCPRES0413

9

DisclaimerHSBC Bank Plc


Opening of the PRC capital markets and

China Access Channels

Evolution of the regulatory approach for

Luxembourg UCITS funds

Stéphane Karolczuk

Partner, Head of Hong Kong Office

Arendt & Medernach


Possibility to invest in / take exposure to a wide range of asset securities listed in

Hong Kong, Singapore or securities traded on other regulated markets (such as Dim

Sum bonds issued in Hong Kong or elsewhere), A-Shares, A-Shares financial

indices, RMB fixed income securities, etc

Possibility to use a UCITS structure in conjunction with R-QFII license/quotas.

Allocation of R-QFII quotas by managers based in Hong Kong, but also in the UK,

France, Germany, South-Korea, Taiwan, Singapore, Switzerland, Qatar, etc… and

Luxembourg

Investments in A-Shares and listed RMB bonds but also in RMB fixed income

securities dealt with on the China Interbank Bond Market (CIBM) with or without

licences

Possibility to use a UCITS with QFII/RQFII license/quotas

Possibility to use UCITS with Stock Connect, CIBM and Bond Connect

Overview – China Access Channels and UCITS

2


Before 2012, indirect investments in the PRC via p-notes or other derivative instruments

with China A-shares or other PRC assets as underlying assets. Direct investments in the

PRC were very limited

Concerns over the liquidity of the China A-shares market/foreign exchange controls

Reason of such limited access: QFII rules not fully compatible with UCITS rules since

(i) lock-up period of 1 year, (ii) monthly repatriations, (iii) regulatory approvals required

prior to repatriations, (iv) other limitations

As a result, limitation to the exposure to China A-Shares (in Luxembourg to 35%

of the NAV of the UCITS)

QFII and UCITS (1/2)

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End of December 2012, new QFII rules issued by PRC authorities

Creation of the concept of Open-ended China funds, i.e. “open-ended securities

investment funds that are established abroad in public offerings, [with over 70 percent of

the funds invested in China]”

• Lock-up period of 3 months but possible specific arrangements

• Weekly repatriations

• Overall limit of 20% of the quota per month

Requirement for 70% investment in the PRC capital markets to qualify as Open-ended

China Fund no longer applicable (as per SAFE public announcements)

In February 2016, new QFII rules update permitting in particular daily liquidity.

As a result, the regulator in Luxembourg agreed, as a matter of principle, not to limit

exposure to China A-shares in UCITS qualifying as QFII open-ended China funds

QFII and UCITS (2/2)

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R-QFII open ended funds (i) are not subject to a lock-up period, (ii) can proceed to

daily repatriations and convert freely from RMB into any other currencies, and vice-

versa within the limits of the R-QFII quota and (iii) are not subject to maximum

repatriation amounts per month

The compatibility with UCITS was not an issue, however, the possibility to delegate the

portfolio management function and allow sub-managers to use their R-QFII quotas with

a foreign fund structure was not clear until end of 2013

R-QFII sub-management (delegation of portfolio management function to an R-QFII

manager) model is now widely accepted

Extension of the R-QFII regime to jurisdictions other than Hong Kong (including

Luxembourg) and use of those R-QFII quotas with their UCITS

Luxembourg R-QFII quota used with Luxembourg UCITS and management companies

R-QFII and UCITS (1/3)

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consequences in case of removal and/or replacement of the R-QFII licence holder orinvestment manager

specific risks in relation to R-QFII investments, specific restrictions or managementtechniques set in relation to R-QFII investments

eligibility of instruments to be invested in and markets on which those instruments are tradedor listed

foreign exchange aspects and mechanisms in place to ensure redemptions on a regularbasis (fund currency, share classes and related currencies, hedging techniques)

due diligence and selection process applied to brokers and sub-custodians

safekeeping/conditions of account opening of/for the fund assets

segregation of assets with the PRC custodian

Questions to address in the application


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additional considerations in case the R-QFII licence holder or investment manager

wishes to invest in securities traded on the China Interbank Bond Market (CIBM)

description of the characteristics of the CIBM

description of the specific risks relating to the issuers

information on risk management techniques enabling to mitigate default risks

information on the credit rating review process

CSSF annual report 2014

Questions to address in the application


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Following the revised rules issued by the People’s Bank of China in summer 2016, CSSF is allowing UCITS managers to have direct access to onshore RMB fixed income securities dealt on the CIBM.

Managers may therefore increase their allocation to RMB fixed income securities without QFII or RQFII licenses and quotas

Conditions to be fulfilled:

• Formalities to be handled by the relevant managers in China with their bonds settlement agents and the People’s Bank of China

• Prior approval by CSSF

• UCITS prospectus to include a reference to CIBM Direct Access and particular risk disclosures in the prospectus

CIBM Direct Access

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Stock Connect between the Hong Kong Stock Exchange and the Shanghai Stock Exchange

launched in November 2014

Luxembourg UCITS authorized to make use of Stock Connect as from December 2014,

subject to certain conditions:

• Stock Connect qualifies as regulated market for UCITS;

• Proper segregation of assets throughout the custody chain;

• No counterparty risk over the broker (no “free of payment” but DVP);

• Proper disclosures in the prospectus and the KIID.

CSSF annual report 2014

Integrated vs. multi-broker models

Central Bank of Ireland position regarding Stock Connect

The “Connect” programs (1/3)

Stock Connect

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Connection to the Shenzhen Stock Exchange

Structure similar to the Hong Kong Shanghai Connect from a legal perspective

Not raising major issues in a UCITS environment


Stock Connect

10


Connection to the CIBM

Structure similar to the Stock Connect from a legal perspective

Not raising major issues in a UCITS environment

Similar requirements and questions from the CSSF

R-DvP not yet available for bonds settled through the CCDC

CSSF approves UCITS making use of Bond Connect subject to conditions


Bond Connect

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This presentation of Arendt & Medernach is designed to provide with summarized information and illustrations regarding the

topics covered by such a presentation. This information and those illustrations are not intended to constitute legal advice and

do not substitute for the consultation with legal counsel required before any actual undertakings.

DisclaimerArendt & Medernach

Q&AQUESTIONS & ANSWERS SESSION



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