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Fostering an active two-way market in China
Financial reform and policy changes are some of the key terms oft-used by Beijing officials to describe the Chinese economy’s current transformation. Previously only known as a manufacturing giant, the world’s second largest economy is slowly improving its financial infrastructure
Darryl Yu 18 Dec 2014

Financial reform and policy changes are some of the key terms oft-used by Beijing officials to describe the Chinese economy's current transformation. Previously only known as a manufacturing giant, the world's second largest economy is slowly improving its financial infrastructure to cater to the growing demand of foreign investors wanting to be exposed to Chinese capital markets and Chinese investors seeking to invest overseas.

 

Foreign firms such as BNP Paribas Investment Partners have been slowly positioning themselves for this future scenario. "We don't mind taking the lead when it comes to the greater China renminbi business," explains Tan-Feng Cheng, head of Greater China business at BNP Paribas Investment Partners. "We have a fundamental conviction that the renminbi and the Greater China asset class will become so fundamental for any asset manager operating in this region."

 

Present in China since 2003, (following their joint-venture with HFT Investment Management) BNP Paribas Investment Partners took an additional step in strengthening its China footprint with the recent launch of its Shanghai advisory business in the Shanghai Free Trade Zone (SFTZ).

 

The SFTZ is widely seen as one of the significant initiatives to support economic reforms and as a test-bed for new economic, international trade and investment policies that could be rolled out nationwide. There are over 12,500 companies currently registered with the pilot scheme.

 

Although the fanfare and hype have faded since the launch of the zone in 2013, Cheng believes that companies with a long-term strategy for China should at least have an entity in the zone to understand new regulations coming out from the government. "Market participants were expecting more from the free trade zone, but by looking at the amount of regulations that have come out, we can see that there has been significant buzz and activity."

 

The new investment advisory company is registered under the wholly foreign owned enterprise (WFOE) scheme and aims to showcase BNP Paribas Investment Partners' investment capabilities to China's institutional investors. "We are setting up the building blocks for the long-term," says Vincent Camerlynck, CEO Asia-Pacific of BNP Paribas Investment Partners. "Establishing the WFOE was timely because it was related to the increased ability of Chinese domestic institutional investors to access overseas markets."

 

Currently, the firm has one of the largest qualified foreign institutional investor (QFII) quotas in the industry with US$3 billion and has around US$60 billion assets under management (AUM) in the APAC region.

 

Despite the slowdown concerned facing the Asian giant, BNP Paribas Investment Partners remains committed to China. "The slowdown that we have seen over the last two years is a slowdown by choice so that some amount of structural reforms can be pushed through," says Chi Lo, Greater China senior economist at BNP Paribas Investment Partners. "Beijing's challenge is to balance growth and structural reform at the same time."

 

High profile Chinese reforms such as the Hong Kong-Shanghai Stock connect this November have been widely seen as positive steps for the government even though initial expectations have not been met. "I see the Hong Kong-Shanghai Stock connect as an additional building block by the Chinese government in terms of renminbi internationalization," states Camerlynck. "It is very important that this connection took place against the backdrop of rapid financial liberalization in China."

 

To become the world's largest economy, the Chinese government will have to continually develop its capital markets to attract more players and liquidity into the market place. "If you look at the size of the Chinese economy today and compare it to the QFII, RQFII [renminbi qualified foreign] institutional investors and stock connect, it is very small relative to what the potential liquidity should be," Cheng points out.

 

Through the Shanghai advisory business, the company hopes to also educate mainland investors about the advantages of investing overseas since around 80% of the investor market in China are retail investors. "As Chinese investors start to see more volatility in the renminbi, then the benefits of diversifying a part of their investments overseas would start to catch on," comments Alex Ng, CIO Asia-Pacific, at BNP Paribas Investment Partners.

 

Expecting a drawn-out process of reform, BNP Paribas Investment Partners has confidence in the government's future financial liberalization policies. "I'm sure the government is listening to the market and hearing what the people are saying," states Cheng. "However, at the same time the government clearly is making up their own mind."

 

"The Chinese economy is the largest economy in the world that has the biggest amount of structural reforms unfolding," emphasizes Lo. "That combination is unique to China."

 

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