China capital market changes – enhancing access for investors

China’s Qualified Foreign Investor (QFI) regime has undergone a number of structural changes over the past few months. According to BNP Paribas Securities Services, these are positive developments which see Chinese capital markets increasingly open up and provide greater accessibility to foreign investors.

An in-depth perspective on Chinese capital market changes was the focus at a recent China Access webinar, part of BNP Paribas Securities Services’ global client insight series. Led by Senior Sales Manager, Angely Yip, key speakers and panel members shed light on the updates and their implications for the Chinese investment landscape.

The macro-economic view

Speaking at the webinar, Jason Lui, Head of East Asia Strategy, BNP Paribas Global Markets, provided a bird’s-eye view on China’s macro-economic scene, including significant factors influencing the outlook.

The Chinese market is facing some uncertainty lately, driven by international and domestic factors, resulting in volatility in equity markets in particular.

said Mr Lui.

He presented key take-aways from three critical sources – the most recent National People’s Congress (NPC) meeting, which set an ambitious GDP objective for China; an update on China’s COVID-19 policy; and, importantly, how the State Council statement on market instability addressed investor concerns. The latter led to an equity market rally as investors envisage more proactive monetary policy, more consistent regulations on internet companies, and the government’s intention to boost growth – all viewed as positive economic contributors.

We believe this meeting was able to address investors’ concerns and judging by the near-term market reaction, it successfully mitigated the more extreme bearish sentiment, for the offshore equity market in particular.

said Mr Lui.

“While it may be challenging to achieve China’s proposed GDP growth of 5.5% per annum due to the latest COVID-19 outbreaks, the government may look into boosting investment and lending. Fiscal expenditure is expected to increase by almost 13% in 2022 compared to a 1% decline in 2021, which will provide support to the economy,” he said.

Mr Lui anticipates lending levels to rise this year, up 15% from 2020 and 2021, equating to around 20 million renminbi. BNP Paribas economists anticipate lending to rise by 10-15% this year from the 2020–21 level of close to RMB20 trillion. From a COVID-19 perspective, relaxing some of the social mobility restrictions will also be instrumental in stimulating consumer confidence.

Market structure updates

Shifting to an on-the-ground perspective, Lynden Zuzarte, Head of Custody and Clearing Product for Greater China at BNP Paribas Securities Services, believes changes in particular to the QFI and CIBM direct platforms are making it easier for foreign investors to directly access China’s capital markets.

“Under the QFI scheme, improvements  in foreign entity requirements have meant the transition from quantitative obligations such as minimum assets under management, to more qualitative measures, such as having a good credit history or ensuring effective governance structures are in place.”

There is a lot less paperwork too, lowering the timeframe for initial set up by foreign investors in the Chinese market from three to two months. The widening of investable assets such as commodity futures and the removal of limits on number of securities brokers that can be appointed are also measures in the right direction.

said Mr Zuzarte

Mr Zuzarte confirmed the recent interconnection between the interbond market and the exchange bond market has also been a positive innovation for the CIBM Direct access platform. Once implemented, investors will not need multiple registrations to invest in listed and unlisted debt.

How investors are responding

As changes in the Chinese market structure take place and investor access improves, market participants are taking advantage of the growing flexibility and investment opportunities, according to guest panel speaker Lawrence Tse, Chief Representative, BEA Union Investment Management Limited.

Broader and easier access to the bond market, for example, has activated greater investment in this sector. The onshore Chinese bond market has grown to USD 60 trillion in five years, which is now half the size of the US bond market.

said Mr Tse.

Investors are also beginning to adopt broader investment mandates to include new financial instruments such as securities lending.

Guest panelist, Shelley Yang, CEO and Co-founder of InvesTAO Limited, confirmed that, as access to Chinese markets becomes easier and the investible universe expands, more investors, large and small, are enhancing their investment capability. 

A number of firms are now setting up local joint ventures and diversifying their Chinese product suite. This is leading to a growing need for local marketing and distribution support.

said Ms Yang.

“Overseas investors are demanding a one-stop-shop approach with a single simplified process from local providers, to help them tackle the Chinese regulatory and commercial environment as they enter and expand into this market,” she said.

Chinese markets still very much investable

While the speakers acknowledged investor uncertainty surrounding China’s economy and market performance as well as the importance of maintaining an active approach to investing, the consensus is that Chinese capital markets remain very much investable.

Chinese regulators have also been working on other measures to attract foreign investors.

 The extension of the tax exemption for bond investors to 2025 has been positively received by investors. There’s also easier access to the CIBM Direct for the lodging of new funds, especially for asset managers who are already registered.

said Mr Zuzarte.

Mr Lui added that the State Council’s commitment to greater consistency and transparency around internet platform regulation is a welcome development, and market consultation on the introduction of Delivery Versus Payment (DVP), a global practice where settlement of stocks happens at the same time, is another step in the right direction.

Summary

Julien Kasparian, CEO at BNP Paribas Securities Services in Hong Kong, concluded that even though Chinese market complexities are gradually easing, working with a global custodian with a Chinese onshore presence such as BNP Paribas Securities Services makes the process of setting up local investment in China a lot easier.

As a global organisation, we’ve continued to expand in the region.  In addition to obtaining our QFI licence, we established an Asian desk in Europe in 2021 and together with the Asian team, we’re providing the best on-the-ground support for clients eager to access China’s capital markets.

said Mr Kasparian.

“BNP Paribas Securities Services is committed to continuing to work closely with clients to help uncover new investment opportunities in this ever-changing space,” he said.

Disclaimer

BNP Paribas Securities Services is incorporated in France as a partnership limited by shares and is authorised and supervised by the European Central Bank (ECB), the ACPR (Autorité de Contrôle Prudentiel et de Résolution) and the AMF (Autorité des Marchés Financiers). 

BNP Paribas Securities Services ARBN 149 440 291 (AFSL No: 402467) is registered in Australia as a foreign company under the Corporations Act 2001 (Cth) and is a foreign ADI within the meaning of the Banking Act 1959 (Cth).

The information contained within this document is believed to be reliable but neither BNP Paribas Securities Services nor any of its related entities warrant its completeness or accuracy nor accept any responsibility to the extent that such information is relied upon by any party.  Opinions and estimates contained herein constitute BNP Paribas Securities Services’ or its related entities’ judgment at the time of printing and are subject to change without notice.  This document is not intended as an offer or solicitation for the purchase or sale of any financial product or service outside of Australia and is intended for ‘wholesale clients’ only (as such term is defined in the Corporations Act 2001 (Cth)).  The information contained within this document does not constitute financial advice, is general in nature and does not take into account your individual objectives, financial situation or needs.  BNP Paribas Securities Services recommends that you obtain your own independent professional advice before making any decision in relation to this information.

The information contained in this document is confidential and may not be reproduced in any form without the express written consent of BNP Paribas Securities Services.  Additional information is available on request.

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