Alan Yau Director, Institutional Client Management · Alan Yau Director, Institutional Client Management ... –Deep bond market for growing ... conducted relevant asset management

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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

Non contractual document

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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


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


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


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


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.

HSBC Global Asset Management (France) - 421 345 489 RCS Nanterre.

Portfolio management company authorised by the French regulatory authority AMF (no. GP99026) with capital of 8.050.320 euros

Postal address: 75419 Paris cedex 08

Offices: Immeuble Ile de France - 4 place de la Pyramide - La Défense 9 - 92800 Puteaux – France.

Copyright © 2014. HSBC Global Asset Management (France). All rights reserved. www.assetmanagement.hsbc.com/fr

Non contractual document, updated in January 2014

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Alan Yau Director, Institutional Client Management · Alan Yau Director, Institutional Client Management ... –Deep bond market for growing ... conducted relevant asset management