In a meeting of the Political Bureau of the CPC Central Committee, President Xi Jinping highlighted the importance of stability in the financial markets. According to Chinese media, it is rare for financial risk to be a political concern in China. In addition, the committee pointed out the difficulty of mapping-out a sustainable long-term plan for the property market. It is expected that the capital and property markets will be under strict supervision by Chinese regulators.
As a leading electronic appliance maker, Gree has been generous in distributing cash dividends. The company announced its 10.8 billion-yuan cash dividend plan on April 26, on the back of a strong profit growth in 2016. From 2012 to 2015, Gree distributed a 25.6 billion-yuan cash dividend, the largest dividend among all A-share companies. In the air conditioner market Gree leads the market with a market share over 40% in China.
Data from the China Iron and Steel Association show that Chinese steel companies realized a profit of 23.3 billion yuan in Q1 2017, turning from a loss of 8.8 billion yuan in the same period last year. Noticeably, the net export of China's steel in Q1 2017 declined by 25% YOY. Chinese analysts say that the decrease is attributed to the growth of internal demand and protectionist measures in other countries. The reform also benefits international steel companies such as ArcelorMittal and Posco.
China’s Banking Regulatory Commission issued six guidance and regulations in the past month focusing on risk management. China’s Securities Regulatory Commission and China’s Insurance Regulatory Commission also issued relevant regulations on risk management. These actions are a clear indication that risk management has become the top priority for Chinese regulators in 2017.
China Securities Regulatory Commission (CSRC) recently accused Feng Xiaoshu, a former employee of the CSRC, for insider trading. Feng accumulated 248 million yuan in illegal benefits by secretly investing in listed companies. Chinese analysts believe that the flaws in the Chinese IPO scheme was the main reason for the corruption because the IPO review committee had the final say over the IPO application. Conflict of interest occurs if CSRC employees are rewarded by the IPO applicants.
China's largest bank Industrial and Commercial Bank of China (ICBC) clarified that it did not largely redeem their outsourced investment through third-party asset management companies (AMC). According to a spokesperson of ICBC, the bank has a strict internal risk management system. Chinese media reported earlier that Chinese commercial banks such as ICBC and CCB are increasingly redeeming their investment in asset management programmes in AMCs to meet their balance sheet regulatory requirements.
China Securities Regulatory Commission (CSRC) has issued new regulations for futures companies. The new regulations lift the minimum net asset requirement for futures companies to 30 million yuan and adjusts the allocation requirement of assets with different liquidity, recovery ratio and risks. In addition, the new regulations increase the minimum deposit of asset management divisions of futures companies. The new regulations will come into effect on October 1.
State Administration of Foreign Exchange (SAFE) announced on its website that it has entered into a cooperation memo with General Administration of Customs and State Administration of Taxation to exchange information. The three regulators will work together to crack down on violations such as smuggling, fake invoices and FX arbitrage. The three regulators are also able to share information with each other to better monitor the market.
As the largest asset management company in money market fund, Tianhong AMC has become the first asset management company to exceed 1 trillion yuan AUM in mutual funds as of the end of Q1, 40% up from year-end 2016. Their money market fund "Yuebao" under Alibaba's Alipay platform, achieved 1.14 trillion yuan AUM. According to Wind, the overall fund industry incurred a loss of 253 billion yuan in 2016 while Tianhong AMC's mutual funds still earned a 19 billion yuan for its clients.
China Insurance Regulatory Commission (CIRC) has issued new guidance on risk management for insurance companies. In a difficult business environment, some insurance companies pursued risky assets and expanded their balance sheets aggressively, which created a tension between the asset and liability sides of the business. CIRC will keep an eye on those companies expanding too aggressively and produce new rules to fill the regulatory gap.
China Banking Regulatory Commission (CBRC) recently issued guidance to provincial CBRC offices to list high-risk companies. The guidance highlighted the risks arising from corporates in Shandong and Liaoning province acting as guarantors for one another, which led to a number of defaults in related companies in Shandong province. The guidance also requires banks to investigate the relationship between the guarantor and the guarantee.
Value investors in China's A-share market have been benefiting from a tightened supervision of the equities market. Since Liu Shiyu, chairman of China Securities Regulatory Commission (CSRC) was appointed last year, blue-chip stocks with solid financial performance such as Kweichow Moutai have seen steady growth in their share price. However, it becomes difficult for short term traders to speculate. According to Chinese analysts, the gradual changing pattern of China's A-share market is attributed to chairman Liu's speeches that encourage investing in companies with real value.
As China’s Banking Regulatory Commission (CBRC) continues to tighten its regulation on the asset management industry, Chinese state owned banks have started to redeem their investment in asset management products including mutual funds, proprietary accounts and other asset management plans. ICBC, CCB, Industrial Bank and Citic Bank have redeemed most. According to Chinese media, CCB will redeem as much as 100 billion yuan worth of investments. Chinese analysts explained that the large redemption was due to the upcoming MPA (macro prudential assessment) by the PBOC.
Premier Li Keqiang stated in a meeting of the state council that China will further cut 380 billion yuan tax in 2017. According to Li, the VAT (value-added tax) reform will stay in place. Furthermore, SMEs will be able to waive their income tax. Startup companies as well as technology companies can further enjoy tax benefits.
CBRC is investigating the shareholders of Chinese joint stock commercial banks. According to Chinese media, shareholders with "leveraged" capital will be the main focus of the CBRC as it did not want short term investors in China's banking sector. For the past few years, China's insurance companies have been aggressively investing in Chinese banks, which makes the shareholder structure or even corporate structure of Chinese banks more complicated.
Chinese media reported that China Minsheng Bank Beijing branch's senior managers privately sold their wealth management products to their private banking clients. The contract value was around 3 billion yuan and the annual yield of those products was 8.4%. According to Chinese media, the proceeds were used for paying their existing liabilities. The incident has suggested problems in Minsheng Bank's internal risk management system. Currently, three senior managers of the bank have been under investigation.
Data from Wind shows that as of the end of April 18, 1510 A-share companies have announced their cash dividends plans. Market analysts stated that regulators' recent emphasize on cash dividends suggested that cash dividend could be included in one of the criteria for private placement or allotment. Analysts expect it possible inclusion will bring in more long term capital in China's A-share market.
State media under PBOC learned from a source that the work focus of PBOC, CSRC, CBRC and CIRC for the year 2017 will be controlling risk in the financial system. Employees working in the banking industry confirmed that some banks are under investigation by the regulators and those banks are adjusting their business coverage. One of the main issues that the regulators are trying to crack down is the arbitrage opportunities in the banking system especially in the interbank market.
Wang Yi, Minister of the Chinese Ministry of Foreign Affairs officially announced that the One Belt One Road summit will be held in Beijing on May 14-15. President Xi Jinping will attend the summit and host a roundtable session. Currently, leaders from 28 countries, including Russia and Spain, have confirmed their attendance.
Xiang Junbo, the former chairman of China’s Insurance Regulatory Commission (CIRC) was officially delisted from the list of CIRC management due to alleged violation of anti-corruption rules. The removal was confirmed by the state media Xinhuanet. The vice chairman Chen Wenhui will temporarily take charge of the CIRC.
China issued over 900 billion yuan of asset backed securities (ABS) products, 50% up from 2015, according to information disclosed by the People's Bank of China. ABS products under the Credit Asset Securitization Scheme (CASS) amounted to 390 billion yuan. As of the end of 2016, 14 Non-performing Asset Securitization (NPAS) products were issued with a total size of 15.6 billion yuan.
Liu Shiyu, chairman of China Securities Regulatory Commission (CSRC), has criticized A-share companies giving out large stock dividends in a meeting with representatives of listed companies. According to Liu, some companies gave out stock dividends as large as 300% to existing shareholders to drive down the share price and attract more investors.
The share price will then increase again and large shareholders can exit their positions and benefit from the rising share price. Liu said that CSRC will keep an eye on those companies and may impose disciplinary actions towards them.
Since the China Banking Regulatory Commission (CBRC) issued guidance to crack down on misconduct in the banking sector on April 7, it has frequently conducted market inspections – especially investigating employees working in banks or at regional banking regulators.
According to Chinese media, some banks' senior managers misused their power to hire their own relatives or lower the threshold of entry for them. Some officials working for banking regulators did not impose sufficient due diligence on banks with good relationships with those officials. Those involved in violating the law will be subject to disciplinary action.
The China Banking Regulatory Commission (CBRC) issued a circular on the transactions of banks' large shareholders. Under the circular, regulators will keep track of all equity transactions from large shareholders in both primary and secondary onshore and offshore markets.
In addition, equity transactions from related parties will also be closely monitored. The objective of the new circular is to regulate the shareholders' activities of stock trading so that the interests of retail investors can be well-protected.
A new securities law will add legal requirements suggested by the Standing Committee of National People's Congress to existing capital market legislation.
According to Chinese media, additional requirements on cash dividends of listed companies and restrictions on large shareholders' liquidation of their shares will be included in the new securities law. It will also empower the officials of CSRC to investigate companies where appropriate.
Although China Unicom has not yet disclosed its new share issuance programme, Chinese media have already reported that new shares, equalling 30 billion yuan, will account for 20% of the total outstanding shares.
Alibaba and China Telecom have committed to buying new shares from China Unicom, and State-owned Asset Supervision and Administration Commission (SASAC) has also committed to buying a comparatively larger portion. In addition, the employees of China Unicom are also allowed to subscribe to the new shares.
As Tianhong Asset Management Co disclosed its annual report, 39 asset management companies in China have released the results of their financial performance in 2016.
Tianhong Asset Management Co is still the largest AMC (Asset Management Company) in China with AUM (Assets Under Management) of 1.3 trillion yuan, while the most profitable AMC is ICBC Credit Suisse Asset Management Co, with a net profit of 1.64 billion yuan. Aegon-Industrial Fund Management Co had the largest net profit margin of 40.25%, followed by China AMC with a net profit margin of 35.52%.
The A-share market, including Shanghai and Shenzhen, priced 123 IPOs in Q1 raising 58.9 billion yuan as of the end of March, according to data from Wind. This is the most active first quarter by number of IPOs in the last six years.
According to Chinese media, GF Securities, Haitong Securities, China Securities, Citic Securities and CICC are the top five underwriters in Q1, accounting for a 39.4% market share. Guangfa securities earned the most underwriting fees totalling 465 million yuan. Citi Orient Securities earned 141 million yuan in underwriting fees, the most among all joint ventures.
China Banking Regulatory Commission (CBRC) has issued official guidance on risk management for commercial banks. The guidance highlights ten aspects of risk management, including credit risk, liquidity risk, bond investment, interbank business, wealth management and product distribution, real estate, local government debt, fintech, external risk, and other risk.
Since the appointment of CBRC chairman Guo Shuqing, China's banking watchdog has been active in monitoring the risk within the banking industry. It is expected that managing risk will be a key focus for the CBRC.
China's bluechip company Kweichow Moutai overtook Diageo to be the world largest liquor company on April 10. On that date the market cap of Kweichow Moutai was US$71.72 billion while the market cap of Diageo was US$71 billion, according to East Money Information.
Kweichow Moutai focus their business on the Chinese white wine, baijiu; Diageo is the British multinational responsible for a range of drinks and brands such as Smirnoff vodka, Guinness, Gordon’s gin, and others.
The market for baijiu has been booming on the back of the increasing price of baijiu. Baijiu companies have benefited from the growing profit margin.
Xiang Junbo, the current chairman of China Insurance Regulatory Commission (CIRC), is now under investigation due to alleged violation of anti-corruption rules, according to the Central Commission for Discipline Inspection (CCDI).
Xiang becomes the highest-ranking official in the financial industry to be caught up in the government’s crackdown on financial malfeasance and corruption. According to Chinese media, Zhou Mubing, the current president of Agricultural Bank of China (ABC), will be appointed chairman of CIRC.
Liu Shiyu, the chairman of China Securities Regulatory Commission (CSRC), has said in a conference that CSRC is keeping a close eye on the listed companies that have capabilities but never distribute cash dividends.
According to Liu, some large shareholders of listed companies boosted the stock price by allocating net profit to retained earnings, and then liquidated their holdings, which harms the interest of retail investors.
As of end of March, excluding recently listed companies since 2015, 31 A-share listed companies have not issued cash dividends. Shenyang Jinbei Automotive Company, the largest automobile manufacturing company in Liaoning province, has not issued dividends since 1993.
State-owned Assets Supervision and Administration Commission (SASAC) disclosed that 31 central SOEs have announced their long-term investment plan for the Xiong'an economic zone, including China Railway Group, China Unicom and the Metallurgical Corporation of China.
Most of the SOEs will participate in infrastructure projects in the new economic zone. Financial institutions such as China Construction Bank, China Merchants Group and State Development & Investment Corp also stated that they will provide financial support to the new economic zone in terms of direct investment and fund raising.
China Unicom, the state-owned Chinese telecommunications company announced that it will soon announce a significant change in their corporate structure. China Unicom is the only telecom company among the first batch of six SOEs to be restructured that include Eastern Airlines, China Southern Power Grid, Harbin Electric Corporation, China Nuclear Engineering Corporation, China State Shipbuilding Corporation and China Unicom. China Unicom is also the first A-share listed company that released a mixed-ownership reform program. According to Chinese media, China Unicom will engage private and state owned investors by issuing new A-shares.
Chinese A-share listed companies are selling properties to increase their profit. In 2016, over a hundred companies sold their properties with an amount over 2 billion yuan. In the meantime, 105 listed companies reported a net profit less than 10 million yuan. Shenzhen Hifuture Electric, a Shenzhen listed company, announced at the end of March that it sold 34 units of properties in 2016, amounting to 50 million yuan.
According to Chinese officials, the third economic zone "Xiong'an" will explore a new property development model. It is possible that a Singaporean model will be adopted in Xiong'an in a bid to attract more young talents to work for the new economic zone. In the zone, cheap flats will be rented to young people and startups. Currently, housing prices is one of the biggest hurdles for startup businesses.
Following the official launch of the third special economic zone in Xiong'an on April 1st, the Chinese State Development & Investment Corporation (SDIC) became the first company to invest in the new economic zone. SDIC is currently one of the largest private equity investment company among all state owned companies. According to Chinese media, SDIC has already set up a one billion yuan Beijing-Tianjin-Hebei investment fund to support the new economic zone.
A couple of Chinese stocks related to the Xiong'an new economic zone including A-share and H-share have benefited from the launch of the new economic zone. In the A-share market, over 64 stocks including the BBMG Corporation and China Fortune Land Development reached the 10% price increase limit. In the H-share market, on April 3rd, stock prices of BBMG Corporation increased 34.67% and China Suntien Green Energy Corporation increased by 12%. In the US market, China Auto Logistics's stock price rose by 90% during April 3rd the 4th trading period.
Chinese media have reported that ten bonds from seven issuers have defaulted in the first quarter of 2017. Except for Huasheng Jiangquan Group, the other six companies are regular defaulting issuers. Dongbei Special Steel was involved in 10 bond defaults so far. Data from Wind shows that in Q1 2016, 18 bonds with an amount of 12.7 billion yuan had defaulted. In addition, 100 bonds were announced to be postponed or cancelled as of March 17, 2017 much higher compared to previous years.
A NASDAQ-listed Chinese company called Wins Finance Holdings surprised the market in February, as its stock price peaked at 45-times that of the IPO stock price. According to Chinese media, the company was the best performing stock on the NASDAQ stock exchange. However, the stock price turned around quickly, dropping over 50% afterwards. The business specializes in financing services.
China's commodity and derivatives market has seen a breakthrough following the CSI 50 ETF option introduced by Shanghai Stock Exchange in 2015. The soybean meal (a soybean extract) option, introduced by Dalian Commodity Exchange, marks the first commodity option in China's financial market. According to Dalian Commodity Exchange, a corn option and a soybean option are in the pipeline. In April, a sugar option will be available on the Zhengzhou Commodity Exchange. Fang Xinghai, vice chairman of China Securities Regulatory Commission, said at the opening ceremony that China will consider to bring more new option products to the market.
Shanxi Free Trade Zone will be launched on April 1, according to Chinese media. As one of the third batches of seven free trade zones, it will rely on its geographical advantage to provide support and services to countries along the silk road. In addition, Shanxi Free Trade Zone will take the responsibility to lead the western provinces to develop their economies. Other free trade zones will have different strategies. For example, Liaoning Free Trade Zone will focus on the relationship with Japan and Korea.
The 2017 budget from the Chinese Ministry of Finance shows that the contribution rate of the mandatory pension fund for employees and employers rose by 5.5%. The size of the increase was the lowest in the past ten years. The contribution rate had risen around 10% consecutively over the past 11 years until 2016. The rate was only lifted by 6.5% in 2016. It is expected that the contribution rate will continue to slow down as the national pension fund starts to face future payment pressure.
As asset management companies and fund companies released their annual reports, Chinese media observed that structured funds have reported a significant loss in 2016. Structured funds have incurred a loss of 21.4 billion yuan, which accounted for 20% of the total loss in the Chinese funds industry. Wind data shows that over half of all funds that have released their reports have lost their net asset value. On the other hand, Money market funds, QDII funds and bond funds were the three best performing funds compared to all other fund categories.
According to Chinese media, the Chinese government’s supply side reform is aimed at managing the overcapacity of 50 million tons of steel and to eliminate “zombie companies”. In three to five years, the debt ratio of the whole steel industry should be lowered to less than 60%. One way to achieve this would be through M&A within steel industry. Hebei province, a steel intensive location, will cut down steel companies from 106 to 60 by 2020.
As Chinese financial regulators tighten their requirements on real estate purchases, some major property developers have expressed their pessimism towards housing prices. Local industry leader Vanke has already started to beef up its corporate reserves in event that the Chinese housing market faces a downturn. Local rival Evergrande announced that it would pay back its debts in advance. Since March of this year, 25 cities have implemented new rules to restrict speculators from buying real estate.
Data from MSCI shows that since 2017, MSCI China Index has risen by 14%, more than US and Japan, and the World index. According to Chinese media, it is the best performing quarter of Chinese stocks including A-share, H-share and US listed shares since 2006. Some global institutions such as Goldman Sachs and BlackRock are bullish towards Chinese stocks in statement issued earlier this year.
Chinese media observed that mutual funds following the “One Belt One Road” (OBOR) theme have seen a significant increase in net asset value. For example, the net asset value of Everbright OBOR fund increased by 31% since January 28. Wind OBOR index has increased by over 30% over the past 13 months. China West Construction Group, a leading construction company participating in OBOR, has seen 10% daily price increase limit in five out of past six trading days.
The State Administration of Foreign Exchange (SAFE) is closely monitoring forex transactions by Chinese commercial banks. An undisclosed large joint stock commercial bank faced disciplinary action by SAFE with a fine of 3.5 million yuan due to the bank's misconduct in FX transactions worth US$200 million. The branch has also been instructed to stop selling FX to its corporate clients for one year. According to Chinese media, SAFE included this case in a window guidance document that was distributed to major banks, warning Chinese banks against misconduct.
The People's Bank of China, Ministry of Industry and Information Technology, China Banking Regulatory Commission, China Securities Regulatory Commission and China Insurance Regulatory Commission jointly issued official guidance regarding financial support to manufacturing companies. The guidelines support high-tech manufacturing companies in becoming listed on the stock market and other support for financing. In addition, Chinese regulators are also encouraging financial innovation in terms of bond issuance and securitization for manufacturing companies.
Chinese media observed that 9 listed banks, including China Merchants Bank, Shanghai Pudong Development Bank, Industrial Bank, Citic Bank and Everbright Bank, have announced their refinancing plans, totalling 240 billion yuan. The refinancing tools include share allotment, convertible bonds and preferred stocks. Chinese analysts attribute the urgent need for refinancing to the strict capital adequacy ratio required by PBoC's MPA (Macro Prudential Assessment).
In the face of the upcoming MPA (Macro Prudential Assessment) of People's Bank of China (PBOC), some Chinese small and medium banks are experiencing a shortage of liquidity to meet the requirements of the MPA. Chinese large banks are unwilling to lend in the interbank market as they also need to maintain a certain level of reserves. Moreover, the open market operation by the PBOC has been paused. Chinese analysts expect that market liquidity will remain tight for the rest of this month and that PBOC is trying to shrink the liability of Chinese commercial banks.
Chinese media learned from source that an official guidance on Shanghai Free Trade Zone by the Chinese state council is in the pipeline. The new guideline includes a further relaxation on onshore IPO and bond issuance by overseas issuers. According to Chinese media, overseas corporates are able to be listed on the A-share market in both the main board and NEEQ (National Equities Exchange And Quotations), China's OTC market.
Huishan Dairy Corporation, a Hong Kong listed Chinese dairy company, shocked the market last Friday, with its share price plummeting 85%. It was discovered that the chairman of the company pledged his stocks and invested into the property market. The failure of the investment is expected to turn the debt into non-performing loans. The margins of the debtors with the company's stocks as collateral have been cut substantially, which has led to a stock price drop .The chairman admitted that the company has run out of its cash and it will soon officially announce this to strategic investors.
The SOE restructuring fund, a fund set up in 2016 focused on SOE reform, will invest 30 billion yuan in 2017. In addition, a SOE M&A fund, a sub-fund under the SOE restructuring fund will be set up with an initial amount of 50 billion yuan. The SOE restructuring fund recently invested 1.8 billion yuan in Air China and made its first A-share investment in Metallurgical Corporation Of China. Late last year the fund also acted as the cornerstone investor in China Securities’ US$1.1 billion Hong Kong IPO.
Blocking Chinese insurance purchases on its system last October, China’s UnionPay is now turning its attention to the property transactions. According to several reports, all property agencies are currently not allowed to accept payments from UnionPay bank cards issued in mainland China. The latest restriction on UnionPay payments is targeted to curb capital outflows from China. Market data shows that in 2016, mainland buyers accounted for 13.8% of new first hand property sales in Hong Kong.
The profitability and even more importantly continuous profitability of a Chinese company has been traditionally been considered as the most significant factoring in getting A-share IPO approval from the CSRC (China Securities Regulatory Commission). However, Chinese media observed that the number of IPO applications that were rejected by the CSRC were increasing based on a lack of compliance, poor accounting treatment and unclear information disclosure. Chinese analysts believe that the transformation suggests that China is willing to move towards an IPO registration system that considers both company profitability and compliant procedures.
Citic Securities released their annual report in 2016. Despite a 47.65% decrease in net profits, Citic Securities still lead the league table of securities companies with a net profit of 10.37 billion yuan. Data from Securities Association of China shows that since 2006, Citic securities has held the top rank on the league table. However, the net profit gap between Citic and the second securities company, Guotai Junan Securities, has narrowed down to 4.1 billion yuan in 2015 to 500 million yuan in 2016. Chinese analysts expect Guotai Junan to be Citic's strongest competitor once the firm is listed on Hong Kong stock exchange later on this month.
Shanghai appears all set to speed up its collaboration with London following the official launch of the Shanghai Clearing Center London office yesterday. Chinese media learned from a source that the Shanghai London stock connect is likely to see a breakthrough in 2017. The system has reportedly already passed all technical hurdles. London is the second largest offshore renminbi clearing center. Chinese experts expect that as a result of Brexit, the UK will have more freedom to engage in more bilateral trade agreements, which will aim to enhance the China- UK relationship.
As Tencent released its 2016 annual report, the company overtook Alibaba again to be the largest company in terms of market cap in emerging markets. The net profit of Tencent has risen by 47% YOY in 2016 Q4. The two Chinese technology leaders have been taking turns leading the emerging market stocks. Since March, Tencent has been sitting on top with its market cap increasing 18.7% YTD. Moreover, the stock price of Alibaba has increased by 19.7% over that same time period.
A venture capital investment fund from CreditEase, the parent company of Yirendai, the first US listed Chinese fintech company, has recently announced their investment in US fintech companies Trumid, WeConvene and WorldCover. The fund was established in February 2016 with an initial amount 6 billion yuan, including dual currencies of 3 billion yuan and US$500 million. The US dollar investment will focus on fintech companies at mid or early age development stages while the RMB investment will focus on more mature companies.
Data from Hithink RoyalFlush Information shows that as of March 21, 479 A-share listed companies have declared their cash dividends. Among all companies that have already released their 2016 annual report, 11 companies even declared a larger dividend than their net income and 22 companies with net loss have also declared dividend payouts. According to Chinese analysts, due to a restricted share redemption towards large shareholders, a cash dividend program seems to become the only way for large shareholders to get some cash out of their holdings. The tightened onshore financing regulation also adds to the growing appetite for cash dividends.
Data from Wind shows that as of March 20, 450 out of 1,400 bond investment funds have seen shrinking net asset values. One fund suffered the largest loss decreasing 3.53% YTD in its net asset value. While the bond market has been gradually recovering from the bond crisis at the end of 2016, the average return of those 1,400 bond investment funds was only 0.19% YTD, even smaller than the return of money market funds, which is averaging 0.71% YTD.
According to Chinese media, the first official guidance by Ministry of Commerce and National Development and Reform Commission on ODI (overseas direct investment) will be issued in 2017. The guidance will give specified rules on the investment reviewing process, capital flows, profit allocation and tax policy. The guidance will also list out both encouraged activities and banned activities. Currently, there are only two applicable regulations from Ministry of Commerce and the State Administration of Foreign Exchange on ODI activities. However, those two regulations have been criticized for being unable to cover all concerned areas and not being enforced.
With the slowdown or even decrease in the number of new physical bank branches, the demand of bank tellers have also been declining for the past few years. Data from China’s Banking Association shows that in 2016, ICBC, ABC and CCB cut 14,090, 10,843 and 30,007 tellers respectively. With respect to joint stock commercial banks, the reduction in tellers is less substantial. Citic Bank, for example, cut 2,494 tellers in 2016, which is the most among all joint stock commercial banks.
As the end of Q1 come close, market liquidity is starting to get tight again in China’s interbank market. Both small banks and large banks are struggling to find funds. Experts explained that the tightened liquidity is due to the upcoming MPA (Macro Prudential Assessment), maturing interbank deposits, local government bond issuance and US rate hike. According to Chinese media, some banking institutions had to pay a 10% overnight interest rate.
In 2016, the total amount of Overseas Direct Investment (ODI) from Chinese corporates has grown by 40%. Pan Gongsheng, minister of State Administration of Foreign Exchange (SAFE) said in a recent forum that cross-border M&A by Chinese corporates is generally beneficial. However, some irrational investment activities such as M&A deals involving unrelated companies have been noted by SAFE. Pan said that some companies with existing high debt ratio still use acquisition financing to make overseas M&A and some companies even go through ODIs to transfer their onshore assets out of China.
The Chinese lithium battery market is likely to see a boom in three years, that’s according to Chinese media who report that by 2020, Chinese lithium battery manufacturers will overtake Tesla and be the largest group in the world. The significant growth in the Chinese lithium battery industry is in line with the growth of the new energy vehicle industry within China. Strong support from the Chinese government towards new energy is also seen as supporting the rise of the Chinese lithium battery market.
Chinese media reported that 69 asset management companies have had Kweichow Moutai in their portfolios by the end of 2016. Efunds Asset Management owned 5.47 million shares in Kweichow Moutai with a total market cap of 1.83 billion yuan. Since the end of 2005, Kweichow Moutai has seen a 2851.39% growth in its share price. Benefiting from the rocketing share price, Efunds has gained an 8.5 billion yuan return from the most popular stock in China.
According to Chinese media, China has started its deleveraging programme aimed at several key industries including steel, coal, metals and real estate. Since early March, regulators, financial institutions and scholars have been working together to devise detailed rules and guidance for earmarked industries in hopes of reducing their debt. In 2017, regulators will decide the list of companies which will participate in the pilot programme. Financial tools such as securitization or debt-to-equity swaps will be applied in this program.
Chinese property developers have swept the Hong Kong market. For the past seven months, Chinese property developers have spent HK$48.1 billion in Hong Kong land bids, accounting for over half of new land sales. Noticeably, the HNA group was the most aggressive among all bidders. It acquired four key plots of land worth HK$27.2 billion in the last five months. Analysts believe it shows that property developers are looking to diversify their assets in hopes of a better return.
The work report from the NPC says that the target urban employment in 2017 will be 11 million people, 1 million more than the target in 2016. It is the first time in the last four years that China has lifted the target. In the past four years, the number of new employment had exceeded 13 million people. According to Yin Weimin, minister of the Chinese Ministry of Human Resources and Social Security, university graduates will be encouraged to take low level jobs, work SMEs and work in western part of China to cope with the structural unemployment problems in China.
According to Chinese media, an amended securities law will be submitted to Standing Committee of the National People's Congress in April to include more specified rules to restrict large stakeholders of listed companies from selling shares. The law will clear up requirements on how much shares stakeholders can sell, how long stakeholders should hold on stocks before selling them. The general principle is that the stock selling should not undermine the market order and harm investors' legal interest.
NPC has approved that the cap of local government debt will be increased to 18.8 trillion yuan in 2017, 1.63 trillion more than 2016. Since the budget law has been enforced in 2015, the cap has increased every year. Market data shows that the outstanding balance of local government debt has declined 4.3% as of the end of 2016, compared to 2015. The NPC will strictly monitor the debt level of the local government to make sure no one will exceed the debt cap.
Dalian Commodity Exchange and Zhengzhou Commodity Exchange have recently released the contract specifications of soybean and sugar options respectively without disclosing the official trading days. Currently, there is only one exchange traded option in China, which is CSI 50 ETF option. Market analysts believe that the introduction of those two option products will enrich the Chinese exchange traded option market on top of the OTC market.
According to Chinese media, an amended securities law will be submitted to the Standing Committee of the National People's Congress in April 2017 to include more specified rules on investor protection. Under the law, investors will be divided into two groups, ordinary investors and professional investors. Ordinary investors will enjoy a proprietary protection in terms of risk alert and information disclosure. In addition, if there is dispute between ordinary investors and securities companies, securities companies should prove their regulatory compliance without making misleading or fraud statement to investors.
China Securities Regulatory Commission issued a window guidance on the refinancing of the National Equities Exchange And Quotations “NEEQ” (the Chinese OTC market). The window guidance requires a one year lock up period on private placements and has agreed on a premium share price. Prior to the window guidance, there was no such requirement on the NEEQ. An undisclosed source said that the window guidance is aimed to close the door on arbitragers.
Following the NPC, the Chinese Ministry of Finance and State Administration of Tax stated that they would soon release a detailed plan on corporate tax and expense cuts. According to Chinese media, the planned tax cut will be 350 billion yuan and expense cut will be 200 billion yuan. Specifically, the VAT reform will further expand and there will be only three different tax rates applicable to different companies. The new plan will also provide extra benefits to SMEs. The taxable income threshold of companies that can enjoy half tax will be heightened from 300,000 to 500,000.
New regulations are being drafted to oversee the asset management market in a bid to crackdown on the shadow banking sector, as confirmed by the ‘one bank and three commissions’ (PBoC, CSRC, CBRC, and CIRC) at the National People’s Congress.
The new regulations will define the asset management business as an off-balance sheet business. Financial institutions will not be allowed to have asset management businesses within their balance sheets. In addition, proceeds from asset management products will be banned from being invested into other asset management products except for the cases of MOM (manager of managers), FOF (fund of funds) and some other exempted cases.
Under the new regulations, bank deposits and wealth management products are strictly defined as on-balance sheet activities, and should not be invested into any asset management products.
China's insurance market has seen increasing participation by offshore reinsurers. In order to ensure the credit risk and solvency of offshore reinsurers, China Insurance Regulatory Commission issued a circular effective on March 13.
The circular states that onshore insurance companies that share risks and income with offshore reinsurers are able to ask the offshore reinsurers to deposit a margin inside the onshore company. The deposit can either be cash or letter of credit from authorized banks.
G-bits Network Technology, a mobile game company listed on the Shanghai Stock Exchange in January 2017, for the first time temporarily overtook consistent frontrunner Kweichow Moutai as the most expensive stock in the A-share market, including Shanghai stock exchange and Shenzhen stock exchange on March 14.
G-bits is the first mobile games company listed on the mainboard of the A-share market not through backdoor listing. In its 2016 annual report, the company achieved a 235% growth in net income attributed to equity holders, up from 195% in 2015.
By market-close Kweichow Moutai was once again the most expensive stock in the A-share market.
Chinese media reported that the People's Bank of China (PBOC) have imposed a window guidance directed at state owned banks that reduces the new mortgage quota for each bank. Some bankers working in Chinese state owned banks have confirmed to the media that new mortgage loans have been shrinking for the past few months due to less demand and tighter controls over new mortgage loan applications. In addition to the reduced quota, banks should also regularly report their mortgage data to regulators.
China Securities Regulatory Commission (CSRC) and Securities and Futures Commission of Hong Kong (HKSFC) recently announced their successful crackdown on a case relating to market manipulation. The violators manipulated the A-share stock price of Zhejiang China Commodities City Group and obtained an illegal profit of 41.8 million yuan. It is the first cross border market manipulation case since the Shanghai-Hong Kong stock connect was launched in 2014.
Chinese technology leaders such as Baidu, Alibaba and Tencent (BAT) are aggressively investing into US technology startups. Data from CBI Insights shows that BAT as well as JD.com have invested US$5.6 billion into US startups over the past two years. Startups involved come from wide range of technology sectors such as VR (virtual reality), fintech, mobile applications and social media. Over 75% of the deals took place in the US state of California.
Xiao Yaqing, head of China’s State-owned Asset Supervision Administration Commission (SASAC), said in a press conference that 2017 will see mixed ownership reform will expanding towards more SOEs, but it does not mean that every SOE will participate in the reform plan. According to Xiao, whether the SOEs will not participate in the reform or not depends on the conditions such as the business nature of the SOEs. An official document from SASAC shows that in 2016, the mixed ownership reform penetration rate was over 92% among all central SOE subsidiaries.
Zhou Xiaochuan, governor of People's Bank of China (PBOC), said in a press conference that the PBOC, CSRC, CBRC, CIRC and SAFE have already reached an initial agreement on some key issues facing the asset management industry. Zhou summarized some main problems and challenges faced by the industry including too many arbitrage opportunities in China, inefficient cooperation between different regulators and the shadow-banking sector. Zhou however, wasn’t able to reveal more details on upcoming asset management regulations.
According to Zhou Xiaochuan, the long-term trend to open the RMB bond market to overseas investors and issuers will not change. However, China will not intentionally pursue the inclusion of RMB bonds into overseas bond index. Instead, China will open the market in a steady pace. In addition to Zhou's answer, Pan Gongsheng, the minister of SAFE said that the openness would be in two aspects, the panda bond market and the China interbank bond market. Pan also said that China would build a friendlier environment for overseas investors and issuers in terms of accounting principles, law, tax and credit rating.
Government officials from the Shanghai government revealed that the Shanghai free trade zone would further relax restrictions on overseas auditing firms and rating agencies in 2017. Regulators are also drafting guidelines to relax rules on overseas banks, securities companies, asset management companies, futures companies and insurance companies. In 2016, overseas corporates and institutions based in Shanghai achieved a profit growth of 16%. Around a third a Shanghai’s government tax income came from overseas companies. A spokesperson of Shanghai government said that once the official regulation comes out, they would implement it as soon as possible.
Guo Shuqing, the new chairman of China’s Banking Regulatory Commission (CBRC) said in a press conference that Chinese banks are now actively participating in the debt to equity swap activities. Currently, the size of signed contract of debt to equity swap is around 430 billion yuan and over 40 billion yuan has been implemented. Latest data from CBRC shows that at the end of 2016 Q4, the NPL ratio of Chinese commercial banks was 1.74%, 0.02% down from 2016 Q3.
The Chinese government’s proposed IPO registration system was not mentioned in this year’s NPC work report indicating that the regulation of the IPO registration system will be postponed for the second straight year since the idea was floated around. According to Chinese media, China’s Securities Regulatory Commission will maintain the old IPO scheme and keep a close eye on the profitability of IPO applicants.
Wang Yi, Minister of Ministry of Foreign Affairs said in a press conference of NPC that the China-US relationship will be more positive going forward. In particular he highlighted, President Xi Jinping and President Donald Trump’s call last month where both parties reached a consensus on the "One China" principle. According to Wang, the common interest between China and US is larger than the disputes, so it will be beneficial for the two countries to work together. It is the 38th year since the People’s Republic of China established a formal relationship with US.
Wang Yi said in a press conference of NPC that although One Belt One Road is a concept raised by China, the benefit from the initiative will be shared by several other participants. Wang said that in the face of protectionism, the One Belt One Road offers a great opportunity for the world to work together and helps establish an economic rebalance. According to Wang, the One Belt One Road Summit which is scheduled for May 2017 has already attracted over 20 country heads and over 1200 guests over the world.
According to Wang Yi, the biggest issue of China and South Korea is the THAAD missile system. China urges South Korea and the US to stop this project as it threatens China's security. The project also undermines the relationship between China and Korea. On a lighter note, Wang encourages more Korean youth to come to China and learn about the country.
Xiao Jie, minister of the Chinese Ministry of Finance said in a press conference that personal tax reform was still being discussed by officials. According to Xiao, tax on some types of income, such as basic salary, will be calculated and reported once a year. In addition, tax benefits will also be granted to those who gave birth to a second child. The MOF is still considering adjusting tax allowance depending on average level of consumption.
SOEs in China are preparing to make debt to equity swaps in an effort to reduce onerous debt. According to Wang Zhaoxing, vice chairman of China’s Banking Regulatory Commission, applications for debt to equity swaps have been sent to the state council. It is expected that the debt to equity swap programme will start as early as the first half of 2017. Wang said that state owned banks have submitted their applications to set up a legal entity to handle debt to equity swap procedures.
The work report of the National People's Congress said that China will stick to its renminbi reform and keep the currency stable. Chinese analysts say this signals that China will prevent the renminbi from depreciating too much. It is expected that China will boost renminbi internationalization once the value of the currency becomes stable. In addition, China will also make efforts to control the fluctuation of the exchange rate to within a certain range.
Yi Gang, vice governor of the People's Bank of China, said in an interview with Chinese media, that the PBOC will defend the bottom line of financial risks and that it will not let institutions that create risks also benefit from the risks. According to Yi, the PBOC will keep a close eye on the possible systemic risks and would not let it happen. Yi said that the asset bubble issue has always been a key item for him.
He Lifeng, director of the National Development and Reform Commission, said at the NPC (National People's Congress) that the One Belt One Road initiative has got responses from over 100 countries since it was launched. Currently, over 50 contracts with foreign governments and over 70 contracts with international organizations have been signed. For the past three years, investment under One Belt One Road initiative has exceeded $50 billion, according to He.
The timing surrounding the implementation of China’s property tax will be one of the topics not addressed during China’s NPC. Fu Ying, the spokesperson of the NPC said that the draft regulation on property tax will not be included in the agenda this year. Many Chinese analysts see the property tax as an effective and feasible way to control property prices within China. Yet, not everyone is happy about the proposed property tax as some stakeholders' interest may be hurt from the new regulation.
Fang Shangpu, vice minister of SAFE (State Administration of Foreign Exchange) published an article on Chinese media, stating that the restriction on the FX purchase requirement will be gradually relaxed. In terms of the cross-border capital flow, SAFE will set up a negative list consisting of forbidden activities. According to Fang, the main principle will be to prevent speculation on the FX market.
The new CBRC (China Banking regulatory Commission) Guo Shuqing, made his first press conference yesterday. In his statement Guo said he would crack down on the shadow banking sector in China. Guo said firmly in the press conference that CBRC will better regulate the banking environment and monitor misconducts. Guo has been regarded by Chinese analysts as a "real reformer" due to his work as chairman of CSRC (China Securities Regulatory Commission). During that time he pushed forward with weekly reforms.
In a bid to deal with the government’s cap on private placements, which is 20% of outstanding shares, Chinese companies are considering to pay a stock dividend to increase outstanding shares. Since the new refinancing regulation came out, over 20 A-share listed companies announced their stock dividend plans, most of which are at least 60% stock dividends. As of Feb 27, around 40 listed companies announced that they would modify or pause their refinancing plans. Chinese analysts said that the stock dividends may benefit mostly small-sized companies.
Li Pumin, the spokesperson of the National Development and Reform Commission, said in a press conference that in 2017, the investment on fixed assets from 32 provinces will amount to 65 trillion yuan, up from 60.65 trillion yuan in 2016. According to Li, the investment will proceed in an orderly way to avoid repeat construction and oversupply. As of 2016, China has built 22,000 kilometers of high-speed railway and 130,000 kilometers of expressway the most amount compared to other countries in the world.
According to Chinese media, China’s Securities Regulatory Commission (CSRC) will start to include face-to-face interviews in their IPO review process for some applicants. Falsifying financial reports will be one of the key elements the CSRC will keep an eye on. CSRC will also closely monitor the due diligence carried out by the underwriters of those applicants such as securities companies. In addition, the CSRC for the first time will go to rural areas in China to review IPO applying companies. In 2016, CSRC issued a regulation stating that it will support companies from rural areas in their IPO journey.
In an interview with Chinese media after a press conference, Liu Shiyu, the chairman of the CSRC said firmly that the PBOC, together with the CSRC, CBRC (China Banking Regulatory Commission) and CIRC (China Insurance Regulatory Commission) was drafting a regulation on asset management business within China. The main objective of the upcoming new regulation is to control the risk in China's financial system. Data from Chinese media shows that the AUM (assets under management) of asset management units run by securities companies, banks, insurance companies, mutual fund houses, private fund houses, trust and futures companies was 116.98 trillion yuan as of the end of 2016. Among all, AUM of banks was the highest compared to other types of companies.
Senior officials working at Ministry of Human Resources and Social Security said in a press conference that the Ministry had already chosen the asset managers of the pension fund, but that did not mean that the fund would go to A-share market soon. According to Ministry of Human Resources and Social Security, the A-share market is only one of the feasible investment choices of the pension fund. In addition, when the pension fund will invest into A-share market it will depend on market conditions.
Since SF express was successfully backdoor listed on February 23, the stock price has been rising for the past five consecutive trading days. During the first four days, the stock price reached the 10% price ceiling. The chairman of SF, Wang Wei, became the third richest man in China, overtaking Pony Ma, the chairman of Tencent. Currently, SF express is also the largest company in terms of market cap listed on Shenzhen stock exchange.
Following Didi and Uber's subsidy competition, China's share bicycle platforms such as ofo and Mobike started a new round of fundraising competition. On March 1st, ofo completed a series D fund raising US$450 million from a group of investors including DST and Didi. Its competitor Mobike also finished its series D fund raising from Singaporean Temasek. Currently, share bicycle platforms in China have become one of the most popular transportation for Chinese citizens due to their low costs (1 yuan/hour). Analysts from China Securities expect that this market will have a large potential to grow as it successfully addresses people's transportation needs.
Offshore fundraising activities by Chinese corporates has exceeded onshore fundraising for the first time in 2017. According to Dealogic, Chinese corporates have issued US$26.1 billion offshore bonds compared to US$21 billion in onshore fundraising, since the start of 2017. Banks and property developers are the two most active issuers. For example, ICBC, BoC and CCB overseas branches have all issued US dollar and euro bonds in February 2017.
Local media reports in China have claimed that MNCs are facing difficulties remitting profits out of China, however, on interviewing General Motors and some overseas pharmaceutical firms, they denied facing any such difficulties. According to Pan Gongsheng, minister of State Administration of Foreign Exchange, any real trade activities under current accounts will be approved, but any transactions under capital accounts will need to go through stricter approval processes.
According to Chinese media, in 2016 Chinese courts received 5665 bankruptcy filings, up 53.8% from 2015. The increase in bankruptcy cases is attributed to the government's supply side reform policies. Provincial governments and city governments have already stopped subsidizing so-called "zombie companies" and banks have also halted lending to those companies, leading to an increase in bankruptcy filings.
On February 26, 2017, Mr. Liu Shiyu, the president of CSRC (China Securities and Regulatory Commission) announced that their primary objective was to regulate the market in accordance with laws and in order to protect small/medium sized investors. In regards to IPO regulations, Mr. Liu pointed out that market condition is stable enough to increase IPO issuances. Liu also mentioned that the quality of IPOs issued versus the quantity of IPOs is more important.
As a part of China's military reform, the CMC (Central Military Commission) confirmed specific measures of improving the private sectors' participation into the military equipment industry. According to Chinese professionals, by introducing competition to the military industry, the capability of weapon research and the productivity of military manufacturing can be improved significantly. Three segments are most likely to benefit from this reform this includes satellites, aircrafts, and shipbuilding.
Last week, the CIRC (China Insurance Regulatory Commission) announced regulatory action on Qian Hai Insurance for violating regulations and to Evergrande Insurance, for its speculating activities. The chairman of Qianhai Insurance will be expelled from his position. Evergrande Insurance will face one year of restrictions on stock investment, and also be forced to adjust down its proportion ceiling on equity investment to 20%.
In a CBRC (China Banking Regulatory Commission) meeting on Feb 23, Guoshu Qing was officially promoted to be the chairman of the organization. Despite an industry experience of only 15 years, Guo used to work for major financial regulators in China. For example, Guo used to be the vice governor of the PBOC (People's Bank of China), Minister of SAFE (State Administration of Foreign Exchange), chairman of CSRC (China Securities Regulatory Commission) and chairman of China Construction Bank. Guo is known as an advocator of financial reform in China and Chinese officials familiar with Guo all expressed their confidence in the 60 year old new chairman.
In the face of increasing risk regarding China's P2P market, the CBRC issued a guidance on assets on P2P platforms. The guidance requires custodian banks of P2P platforms to run two different accounts. One account will handle asset from clients of P2P platforms and the other account will handle P2P platforms' own capital. The custodian bank has the obligation to monitor those two accounts in case that the platforms may misuse the deposits from their clients. Currently, 32 commercial banks have offered custody service for 180 P2P platforms.
In an effort to attract more participants in China's interbank bond market (CIBM), China Foreign Exchange Trading System announced in its official website that a series of fees were waived for market participants. Starting from 22nd of Feb, qualified non-financial institutional investors are not subject to bond account maintenance fee, trading fee and settlement fee. Trading fees and settlement fees are also waived for qualified market makers.
Xiao Yaqing, director of China’s State-owned Asset Supervision and Administration Commission (SASAC), said in a speech in Beijing that the SOE reform would speed up in 2017. He highlighted that more types of investors would be allowed to be stakeholders in SOE companies. According to SASAC, the capital will be reallocated to the operating activities of the SOE rather than investment activities. In addition, SOE capital from new investors should not be used for other purposes such as investing in real estate and acquiring non-related companies.
According to Chinese media, Chinese securities company Guotai Junan and its Hong Kong branch has recently helped China's social security fund invest in both A-shares and H-shares. Since the beginning of 2017, the H-share market has risen by 10%, outperforming all other stock markets globally. Chinese analysts believe that Chinese insurance companies are main driver behind the surge of interest in the H-share market.
Since the Chinese new year, A-shares related to One Belt One Road (OBOR) initiative have outperformed other sectors. According to Choice, the OBOR sector has seen a 5% increase since the market reopened a few weeks ago. Xinjiang Tianshan Cement, for example, has seen a 87% price increase February 2017 YTD. Chinese analysts explained that the growth represents investors' expectation that some new reform will emerge from the upcoming March meeting of the NPC & CPPCC (National People's Congress & Chinese People's Political Consultative Conference).
Another central SOE named COFCO (China National Cereals, Oils and Foodstuffs Corporation) was reported to participate in the mixed ownership SOE reform. According to China’s SASAC (State owned Asset Supervision and Administration Commission), the SOE reform scheme will be applied to 18 subsidiaries of COFCO. The restructuring is scheduled to be completed by the end of 2018. In 2016, COFCO cleaned out 36 "zombie" subsidiaries that were generating low profits for the group.
The Chinese Ministry of Finance (MOF) recently issued a guidance to encourage local governments with robust cash flows to issue bonds. The MOF also plans to expand the investor base of local government bonds from only financial institutions to non-financial institutions and retail investors. As of the end of 2016, the local government bond market was the third largest bond market in China, only behind the central government bond and policy bank bond markets. China Bond Rating, a domestic rating agency, estimated that the local government bond market will grow to over 6 trillion yuan in 2017.
Chinese media reported that the PBOC (People’s Bank of China) is drafting a guidance on the asset management business of financial institutions. The drafted guidance defines the asset management business as off-balance sheet businesses. In other words, the wealth management products sold by banks are not considered as asset management business and they should be under the liability of the balance sheet. The guidance also requires that asset managers are not allowed to invest in other asset management products. FOF (funds of fund) and MOM (managers of managers) are exceptions to this rule.
A senior banker at a Chinese state owned bank has said in a recent interview with the The Asset that cross border capital flow is not being tightened in China. Instead, the situation differs from province to province. Some areas relying on the manufacturing industry may see a relaxing of regulations on cross border capital flow. According to the banker, cross border activities under current accounts will likely be approved by Chinese authorities.
Currently, overseas investors are allowed to set up onshore wholly owned non-life insurance companies, but can only hold up to a 49% stake in life insurance companies. According to Chinese media, China is considering fully opening the door to life insurance companies for overseas investors. Back in January, the state council made an announcement on its website, stating that China will further liberalize the market by introducing more overseas investors.
According to the Chinese media, Ruihua Certified Public Accountants, the biggest accounting firm in China, was punished by regulators due to a lack of due dilligence and has now been banned from taking on new securities-related business. It is the fifth time that the firm has been penalized by regulators since last year. In January, the Chinese firm already received a penalty from the CSRC (China Securities Regulatory Commission) due to an issue relating to fraud in its audit report.
China’s Securities Regulatory Commission (CSRC) has recently issued an official regulation on refinancing activities by listed companies. The new regulation requires that the amount of new shares through private placement should not exceed 20% of outstanding shares. Listed companies are not allowed to issue new shares within the first 18 months since the company’s last shares issuance. Those companies are instead allowed to issue convertible bonds and preferred stocks. In addition, listed companies applying for refinancing should not have a large amount of financial assets to be allocated for trading purposes.
Chinese media reported that the Chinese pension fund start flowing capital towards mandated asset managers this week. It is likely that the first round investment would be towards equity assets on the stock market. Financial institutions in charge of the pension fund have mandated several asset managers including 14 fund companies, six insurance companies and one securities company. Noticeably, ICBC Credit Suisse Asset Management and Harvest Fund are qualified asset managers invested by Credit Suisse and Deutsche Bank.
In 2016, 14 cities have reported a fiscal income over 100 billion yuan. Shanghai and Beijing are still the leaders with 640.6 and 508.1 billion yuan income respectively. Noticeably, Hangzhou overtook Guangzhou and Wuhan to be the seventh highest earning city thanks in large to the e-commerce market. According to the Hangzhou government, the IT industry has already contributed to 24.3% of the city's GDP in 2016.
In 2016, the state council announced seven new free trade zones (FTZ) including Sichuan, Hubei, Chongqing, Henan, Shanxi, Liaoning and Zhejiang. The Henan government announced in their website that the Henan Free Trade Zone will be officially launched by the end of February. According to Chinese media, the seven new FTZs are likely to officially to launch on a same day in February.
The Chinese State Council has recently released a guidance which looks into the possibility of imposing a property tax in China. According to Chinese media, the government has already started to draft the guidance on property taxes. The new tax will be aimed at clamping down on the speculative investments in the property market.
Chinese property developers are queuing up to issue offshore US dollar bonds in the face of increasing refinancing needs. In January, Chinese property developers issued a total of 3.8 billion USD, 80% of which were callable bonds. In the onshore bond market, due to a tighter window guidance by National Development and Reform Commission, only one property issuer has successfully issued an onshore bond in February. The issuance size in January decreased by 97% compared to the same month in 2016.
According to the Chinese Ministry of Finance (MOF), the country's foreign direct investment (FDI) in January declined by 9.2% due to the "Chinese New Year effect." However, MOF is still optimistic towards FDI in the long term. A large GDP base and consumption market will be the driving force to attract foreign investors. In addition, further reforms also add to the competitiveness of the Chinese market.
According to Chinese media, China’s Securities Regulatory Commission (CSRC) plans to issue a new regulation on refinancing. The potential restriction may limit companies to one refinancing exercise a year. In addition, the refinancing amount will also be restricted within a certain level of the companies' market cap. The growing domestic refinancing market shows that some Chinese companies' intent to arbitrage from an interest rate gap between cheap refinancing rates and a high lending rate.
Chinese media has observed that large stakeholders of A-share companies have been reducing their positions in listed companies. Data from Choice shows that since last December, large stakeholders from 108 listed A-share companies have sold their shares for 278 times, with a total of 32 billion yuan involved. Chinese analysts believe that the frequent liquidation by large stakeholders is not beneficial to the stock market and retail investors. According to Chinese media, industrial experts are calling for a tighter regulation on the stakeholders' looking to redeem their shares.
As a national strategy, the Chinese One Belt One Road Strategy is expected to gain momentum in 2017. The initiative has been frequently raised during central government's meetings and in May 2017, a One Belt One Road summit will be held in Beijing. Data from the Chinese Ministry of Finance shows that the total investment into countries along the economic policy path have amounted to US$14.53 billion for the whole year of 2016.
According to Chinese media, the pilot NPAS (Non-performing Asset Securitization) program is expanding to large joint stock commercial banks and some urban commercial banks. The underlying assets will include personal loans and corporate loans. In 2016, six banks issued 14 NPAS products with a total of 15.61 billion yuan.
China’s Insurance Regulatory Commission (CIRC) says that it will keep a close eye on the "unfriendly investors" that may treat insurance products as a cheap funding source. The CIRC will be cautious in giving new licenses to those who wish to set up insurance companies in China. The business model, equity ownership and the profitability will be main criteria. A negative list will also be in place to keep unqualified potential investors away.
In 2016, only four provinces including Tibet, Shanghai, Guangdong and Tianjin have achieved double digit growth in fiscal income, notching up 17.4%, 16.1%, 10.9% and 10% respectively. The overall growth rate of fiscal income has declined from 9% two years ago to 4.2% in 2016, due to the VAT (value-added tax) reform. Guangdong province still leads the league table with an annual fiscal income of 1.04 trillion yuan, followed by Jiangsu province with 812.1 billion yuan.
The Asset Management Association of China has recently published a regulation on PE products. Under the regulation, PE products are no longer allowed to invest in residency real estate projects in 16 major cities such as Beijing, Shanghai, Guangzhou and Shenzhen. The regulation is aimed to cool down the property market in those selected cities in China.
Chinese media received an official document from the Ministry of Environmental Protection, stating that the government was asking steel and aluminum companies to cut production to deal with severe smog problems in China. The potential target provinces include Beijing, Hebei, Tianjin, Shandong, Shanxi and Henan. The implementation date of the project was not disclosed but it is expected that the project, once effective will be the toughest and strictest ruling on environmental protection.
In response to the current FX control on Chinese citizens, the administrator of the State Administration of Foreign Exchange (SAFE) Pan Gongsheng stated that it wasn’t imposed to prevent further capital outflows. Instead, it is an enhancement of AML (Anti Money Laundering) processes required by G20 to increase the transparency of transactions. Pan also says that China will not go back to the old capital control scheme and that the Chinese financial market will allow more foreign investors in 2017.
The Chinese Ministry of Finance released a 2016 Q4 report on PPP (Public-Private Partnership) projects. As of the end of 2016, 11,260 PPP projects have been registered, with a total planned investment amount of 13.5 trillion yuan. Currently 1,351 projects have been signed, with a total of 2.2 trillion yuan already invested. According to Chinese media, the PPP market in 2016 was overheated because some companies saw PPP projects as a fund raising exercise. In 2017 the market will become more rationale as the regulation will look to address the concerns in the industry.
Data from the China Securities Regulatory Commission (CSRC) shows that in January 2017, Chinese private equity (PE) companies have seen a 740 billion yuan AUM (Asset Under Management) increase. This makes the total AUM of the PE industry in China at around 11 trillion yuan, exceeding the size of domestic the mutual funds industry.
A phone call was made between China's president Xi Jinping and US president Donald Trump on Feb 10. Xi said in the call that it is of great necessity to strengthen the collaboration between China and the US. President Trump in return said that he would respect the One China policy.
China’s Securities Regulatory Commission (CSRC) held a meeting on Feb 10 on regulatory issues on the country’s capital market. Chairman Liu Shiyu gave a speech stating that the CSRC will speed up the IPO review process and allow more companies to tap into Chinese A-share market. In this way, the mispricing of "shell" companies can be corrected.
Two major bitcoin trading platforms, huobi.com and OKCoin made key announcements on their websites. The two companies both stopped providing bitcoin redemption services. Moreover, customers are not allowed to cash out their positions. According to the two companies, their AML systems will be upgraded and within this upgrading period, the redemption service will not be available.
The People's Bank of China (PBOC) talked to 9 Beijing-based bitcoin companies on February 8th, informing them about their existing risks and suggested specified solutions on how to resolve these issues. The PBOC has warned those bitcoins that they should not provide financing services, be involved in any money laundering issues or violate FX/tax regulations. Any violation can be subjected to the disqualification of their business license.
A-share listed companies have been quite active in acquiring unrelated companies in recent year. This has pushed up the valuation of the acquire companies far from its fair price. In a bid to make the valuation more reasonable, China Securities Regulatory Commission (CSRC) requires a more comprehensive information disclosure in the M&A application. For example, the acquirer is required to disclose the rationality and methodology of their valuation in their future M&A applications. In addition, companies have to justify if their real financial performance is much different from their predicted number.
Chinese media has observed that for the past three months, government authorities such as China’s State Council and CSRC have issued several official documents to support Chinese corporates going IPO. Particularly, agricultural companies and emerging industries such as new energy are named by CSRC and China’s State Council as the most supported industries. In addition, corporates in rural areas with financing needs are also encouraged to list. According to Chinese analysts, the support from the Chinese government shows its determination to cope with the financing difficulties faced by SMEs in China.
The People's Bank of China (PBOC) has recently announced the FX reserve data for January 2017. As of the end of January, the FX reserve number dropped below US$3 trillion, to US$2.998 trillion. Analysts attribute the decline to an increasing demand of FX due to a renewed FX purchase quota, a large number of outbound travelling and mature foreign debt. Financialnews.com, the PBOC wholly-owned media, said that 2 trillion FX reserve is enough to sustain China.
The People's Bank of China (PBOC) has increased the interest rates of SLF(short-term lending facilities) and MLF(medium-term lending facilities) around the Chinese New Year period. These were regarded as an indirect approach to raise the interest rate level. There is no speculation on whether the PBOC would raise the real interest rate in the short term. However, state-owned media do not believe there will be a rate hike in the short term because economic fundamentals are still weak in the face of slower investment growth and high financing cost. State-owned media considers the rise in SLF and MLF a measure of PBOC to deleverage and decrease the risk of the money market.
In the People’s Bank of China disclosure of FX reserves in January 2017, Chinese media observed that the PBOC has not increased its gold holdings for the past three months, which is the longest period since 2015. Market data shows that the PBOC has been accumulating its gold holding since 2014. Some analysts believe that the Trump presidency could further move PBOC from USD to gold in event of worsening relationship between US and China.
According to Chinese media, the People's Bank of China (PBOC) issued a window-guidance on some banks to reduce their credit limit to their clients. Some banks can only provide timely consumption loans to individuals while it may take more than one month to apply for a corporate loan. Many Chinese analysts expect that new renminbi loans in January will reach a historical high. As a result, the PBOC is cautious about the overall leverage in the banking system as well as the financial sector.
Chinese commercial banks are likely to increase the mortgage interest on retail customers. Moreover, the property market has seen a cooldown during the Chinese New Year, signaling a potential drop in the property price. Many Chinese analysts believe that there will be a huge pressure on the housing prices within China in 2017.
Data from the National Energy Administration shows that at the end of 2016 China was the largest solar power country. However, the electricity generated from solar energy only accounted for around 1% China’s total power. By 2030, China aims to increase the usage of non-fuel energy to 20%. China has consistently committed to the global new energy industry. China is also the largest wind power producer in the world.
Berun group, an Inner-Mongolia based coal company has defaulted on its 800 million yuan short-term notes. Prior to this, the company had already defaulted on its 1.1 billion yuan notes. The Berun Group still has over 10 billion yuan outstanding debt or liability. However, its operating cash flow in Q3 2016 result was only 416 million yuan. Chinese rating agency China Chengxin International has already downgraded the company to a C rating.
Data from China’s Central Depository & Clearing shows that as of end of January 2017, Chinese government bonds held by foreign institutions has declined by 1.9 billion yuan to 421.7 billion yuan from December 2016. It was the first time since 2015 October that the figure had decreased from the previous month. At the same time, the corporate bonds held by foreign institutions have also seen a drop in January 2017.
Despite the government's strong support towards the new energy sector in China, the industry is still experiencing an over capacity issues. The supply of solar panels and the wind farms are far more than the market demand. For example, in Gansu province, 54% of the wind farms were not in use in 2016. The main reason is that the growth rate of market demand for the electricity is comparatively slow due to a lower production. Moreover, the power network is not yet mature enough to handle large volumes of electricity.
The Chinese New Year is not only a festival for families to get together. Chinese customers also tend to spend a lot on the festival especially when it comes to movies and traveling. According to Chinese media, the box office during the first six days of Chinese new year was 2.924 billion yuan while the travelling revenue during the Chinese New Year period was 423.3 billion yuan. Chinese analysts explained that the surging entertainment consumption is a reflection that there is still attractive potential in China’s consumption market.
Chinese corporates have been quite busy making overseas acquisitions during the Chinese New Year period. Dalian Wanda's US subsidiary AMC acquired Nordic, the largest movie group in North Europe for US$930 million. Currently, Wanda owns 1470 movie theaters and is getting close to its 20% target global market share. Ant Financial acquired MoneyGram, a well-known money transfer company for US$880 million. Fosunfarma a subsidiary of Fosun group also acquired European company called Breas for US$90 million.
Data from Wind shows that in 2016, 767 A-share listed companies have purchased wealth management products totaling 726.8 billion yuan, 39% up from 2016. The increasing need of wealth management products shows that A-share listed companies still own a lot of idle cash. Among all wealth management products, bank wealth management products are still the most favorable, accounting for 72% of all wealth management products sold in China. China Shenhua Energy Company and Xinhu Zhongbao are the top 2 companies investing into wealth management products. Both companies have invested over 20 billion yuan into various wealth solutions.
On January 27, 2016 The State Council of China announced a ban on cross-province financing and transfer services on securities and stock equity of private placement in the regional equity markets. According to Chinese media, cross-province services cause problems because there are supervision gaps in regards to regulations. As of the end of 2016, every province within China has already set up a regional equity market except for Yunnan province, The State Council also announced that it would stop private placement bonds in every regional equity market.
On 26 January, 2016 China’s SAFE (State of Administration of Foreign Exchange) announced new policies for the nation’s FX management. The measures include broadening the range of settlement on domestic and foreign exchange loans.
According to Chinese media, the total amount of local debt issued in 2016 was 6.04 trillion renminbi, this includes the replacement debt of 4.87 trillion renminbi. According to the official data, the total amount of local debt that was needed to be replaced was 14.2 trillion renminbi in 2014, since the replacement debt being issued in year 2015 and 2016 was 8.08 trillion in total, which means that 6.3 trillion local debts are waiting for replacement. According to professionals in China, the overall risk of local debt is now limited, but the potential large impact to some local governments still exists.
Chinese provincial governments have recently disclosed their annual performance in 2016. Guangdong, Jiangsu and Shandong are the leading provinces with a GDP of 7.95, 7.61 and 6.7 trillion yuan respectively. Zhejiang and Henan are the fourth and fifth, with a GDP between 4 to 5 trillion yuan. In terms of GDP growth, Tibet, Chongqing and Guizhou are the top three provinces with a growth rate of 11.5%, 10.7% and 10.5% respectively.
The Chinese Ministry of Finance has disclosed the overall financial performance of state-owned enterprises (SOE). Last year, SOEs have reach a total profit of 2.31 trillion yuan, 1.7% up from 2015. Construction, transportation and real estate are the top three industries contributing to the profit increase. Noticeably in 2016, the total debt increased more than total assets, meaning that the leverage among SOEs was also lifted over the past year.
The People's Bank of China posted a statement on its official Weibo account saying that it still supports justifiable cross-border capital flow and that those justifiable transactions will not be subjected to a maximum quota. State Administration of Foreign Exchange also stated in its official website that any transactions based on real trade will be allowed and will not be restricted. Corporates can still purchase FX using their real invoices as proof.
Data from Choice shows that among 26 listed securities companies, 14 have seen an over 50% decline in net profit. The whole securities industry in China has seen a 55% decline in net profit, compared with 2015 data. In terms of revenue, only two companies have reached revenues of 20 billion yuan.
The People's Bank of China (PBOC) announced on Tuesday that it would implement a MLF (Medium-term Lending Facility) with an interest rate of 3.1%. The rate was 10 bps higher than last time, a signal that the PBOC is trying to tighten the market liquidity. Chinese analysts also consider it as an indirect measure of raising the market interest rate.
For the past eight trading days, the southbound activity of the Shanghai and Shenzhen Stock Connect has seen a 13.6 billion HKD inflow. Chinese media attributed the large volume to a strong interest from Chinese insurance companies and mutual funds. Noticeably, Chinese investors prefer Hong Kong blue chips stocks. Among all the H-shares, China Construction Bank was the most favorable stock, notching up a 1.12 billion HKD net inflow through the stock connect.
China's Ministry of Finance has disclosed the annual fiscal income of year 2016. The total fiscal income increased to 15.96 trillion yuan, achieving a year-on-year growth rate of 4.5%. The growth was the lowest since 1988 due to decreasing tax income resulting from the VAT (value-added tax) reform. Moreover, the Chinese government expenditure reached 18.78 billion yuan or 6.4% up from 2015.
According to Chinese media, several Chinese securities companies are thinking about introducing real-time data platforms of UK stocks with the London exchange. Back in 2015, authorities studied the feasibility of the Shanghai-London Stock Connect. One securities company even invited the London Exchange to hold a forum to introduce the UK stock market to Chinese investors. As Shenzhen and Shanghai Hong Kong Stock Connect was officially launched, more real time prices of international stocks are available on Chinese stock market mobile phone applications.
Zhang Xiaojun, spokesperson of the China Securities Regulatory Commission (CSRC), stated in a press conference that the CSRC would tighten the refinancing threshold for listed companies. According to Chinese media, since 2016 Q4, private placement has slowed down. The average duration of a private placement increased from 81 days to 130 days.
The People's Bank of China (PBOC) has recently issued a new guidance on cross-border financing. In the new guidance, the leverage ratio of cross-border financing has been lifted from 1x to 2x for Chinese onshore corporates. In other words, with a same amount of net asset, a corporate is able to double the funds raised in offshore markets. Foreign corporates and institutions are also eligible to the new guidance. The new guidance is expected to bring more liquidity to the Chinese financial system.
Following new FX regulation issued in early January, the People’s Bank of China (PBOC) further restricted FX regulation towards banks. According to Chinese media, the PBOC told banks to maintain a positive FX position, meaning that the capital outflow should not exceed capital inflow through banks. However, this has only happened in Beijing and Shanghai. The PBOC has refused to comment on the issue.
Didi, the leading ride-hailing company in China is facing setbacks in China due to fewer subsidies. In tier one and tier two cities, taxi fare has become higher when using the Didi app. The potential decline on the company’s users creates pressure on Didi's profitability. In the latest fundraising, investors including Apple and China Life invested $7.3 billion in Didi. But whether the investors can cash out Didi with a good return depends on the financial performance of Didi.
Data from Wind shows that since 2016, the total capital raised through IPOs was 184.5 billion yuan, while the amount raised from refinancing was over 2 trillion yuan. Among all refinancing tools, 781 listed companies chose to raise funds through private placements, with a total amount of 1.73 trillion yuan coming from the exercise. The booming refinancing market in China was largely due to the historic slow IPO review process.
As one of the most problematic provinces in China, Liaoning has been facing a significant slowdown in economic growth. Recently, officials in Liaoning province admitted that the economic data during 2011 to 2014 was fake. It is a good signal that problematic provinces have started to admit their faulty statistics, but question still remains on how to drive provincial growth in the next couple of years.
Data from the Chinese National Bureau of Statistics reveals that the fourth quarter in 2016 has seen a rebound in Chinese GDP growth, reaching 6.8%. It is the first time since 2014 Q2 that the GDP growth has achieved such a level. The economic growth from service sector is up 8.3% last quarter, which contributed most to the unexpected Q4 GDP growth increase. The real property sector also contributed 6.5% of the total GDP. However, the total coal production declined by 9.4% compared to last year.
The State Council of China issued a new guidance on overseas investors. The new guidance lowers the entry level of overseas financial institutions including banks, securities houses, rating agencies and insurance companies. In addition, the Chinese government will also provide support to overseas investors interested in the country’s high tech industry. Non-Chinese tech startups will enjoy the same benefit as Chinese startups. Overseas investors are also allowed to tap the A-share market (mainboard, SME board and National Equities and Exchange Quotations), interbank bond market (corporate bond, convertible bond) and other financing tools.
Chinese banks normally distribute annual bonus to employees ahead of Chinese New Year. According to Chinese media, one employee at Ping An Bank, one of the largest joint stock commercial bank in China, received only 1.5 yuan as their bonus while some employees didn’t even get a bonus. Aside from Ping An Bank, many other non-state-owned commercial banks also made a same decision not to give out Chinese New Year bonuses. The declining profit of Chinese banks is one of the reasons for the bonus suspension.
According to ChinaVenture Group, in 2016, there were 4010 M&A activities completed by A-share listed companies, 23% down from 2015. The total amount decreased by 26% to US$253.2 billion. Even the internet industry, which is the most active sector in onshore Chinese M&A, saw the total number of announced M&A deals decreased by 20.3% to 797 in 2016. The slowdown was largely due to the CSRC's (China Securities Regulatory Commission) tighter regulation on M&A activities.
SASAC (State-owned Asset Supervision and Administration Commission) has recently issued a new regulation on SOE investments. Under the new scheme, a negative list system will be designed to regulate SOEs' investment activities. An onshore negative investment list and an outbound negative investment list will be set up separately. Investments not included in the list will be open to all SOEs.
The People's Bank of China has disclosed data on RMB assets held by overseas entities for the month of December. Overseas individuals or institutional investors have increased their holdings of onshore bonds by 17.9 billion yuan while they decreased their investment in stocks by 60.1 billion yuan. Noticeably, onshore bonds held by overseas investors have increased by 26.3%, from 674.6 billion yuan to 852.6 billion yuan from January to December 2016.
According to China Merchants Securities, since 2002, it is typical to see the SHCOMP index (Shanghai Stock Exchange Composite Index) increase around Chinese New Year. Findings shows that probability that the SHCOMP index will increase during the last five trading days ahead of Chinese New Year is 93.3% while the probability of an increase during the five trading days after Chinese new year is 80%. Analysts attribute the increase in market liquidity, disposable income from retail investors, and change in risk preference around the Chinese new year period.
Chinese retail investors are questioning the speed in which the CSRC (China Securities Regulatory Commission) approves IPOs. This week alone there were a record 15 new companies listed on the Chinese A-share market. People are worried that the new IPOs will bring pressure on stock prices and the secondary market. In a survey done by Chinese media, over 90% of the respondents think there is an unhealthy rapid increase of IPOs in China.
Dongbei Special Steel Group has defaulted again. This time the state-owned steel company missed a payment on its 1.4 billion yuan medium term notes. Since its first default on March 2016, the Dongbei Special Steel Group has defaulted on ten bonds worth 7.17 billion yuan.
According to Chinese media, the CBRC (China Banking Regulatory Commission) is planning to draft a guidance on debt-to-equity swap. Under the new guidance, banks are required to sell assets to counterparties other than their subsidiaries or related companies. Although some banks already transfer those assets off balance sheet, the actual buyers are still their own subsidiaries, meaning that their risk is not truly diversified.
The People's Bank of China has recently issued a new regulation on third-party payment platforms such as Alipay and Wechat pay. The new regulation requires those platforms to deposit at least 50% of their advances from customers into their custodian bank. Moreover, deposits cannot be used for investments purposes. The new regulation aims to restrict the platforms from relying too much on interest rate differential.
China's state council issued a new guidance on the internet and telecommunication industry. The official document points out that it will allow private companies to enter the telecommunication industry in China, which is currently dominated by China Mobile, China Unicom and China Telecom. It is expected that a more competitive telecommunication market can further boost the development of the internet industry in China.
Jiang Yang, vice chairman of China’s Securities Regulatory Commission, states that the organization will force those unqualified listed companies to exit the A-share market to maintain the overall quality of the market. It is common practice in China that unprofitable listed companies avoid being delisted by selling assets to companies that are interested in backdoor listing. Since the CSRC issued a regulation on the delisting procedure in 2014, only two companies were officially excluded from the A-share market.
The Chinese bond market saw a significant price drop last December where bond prices on average decreased by more than 4%. The total bond issue in December was 761.5 billion yuan, 648.4 billion down compared to November 2016. Funds, insurance companies and rural credit cooperatives reduced their stakes in government bonds while urban commercial banks, rural commercial banks and overseas institutions increased their stakes. Noticeably, overseas institutions have been accumulating their holdings in bonds on the CIBM (China Interbank Bond Market) for consecutive three months with a total of 60 billion yuan, despite the overall bond price decline in the CIBM.
New IPOs always bring in a sense of excitement for Chinese A-share investors. In 2016, new listed shares have seen on average a 430% return in their first trading month. However, the CSRC (China Securities Regulatory Commission) has started to speed up reviewing the new IPOs in year 2017. The increase of IPOs, according to Chinese analysts, could lower the rate of return of those new listed A-shares. The relaxed IPO approval process is seen as a way to deleverage the financial market.
Chinese media has reported that the National Council for Social Security Fund has opened applications for Chinese financial institutions (FIs) to manage the country’s fund. The council will base their FI selection how firms approach equity, bond, cash and quantitative investing. It is expected that the pension fund will invest in A-share market soon after the Chinese new year.
Since the A-share crisis in August 2015, the index futures market has been restricted in China. The index futures market was considered as a driving factor of the collapse of the A-share. Chinese analysts believe that it is not likely that the index futures market will be relaxed in the near future.
China Securities Regulatory Commission (CSRC) reviewed the ratings of Chinese securities companies annually. According to Chinese media, companies with a B rating (B,BB,or BBB) accounted for around 50% of total securities companies in 2016.The rating given to Chinese securities companies is based on the CSRC's assessment on the profitability, compliance, risk management and whether they violated any regulations. In 2016, among the total 95 rated companies, 36 are A-rated (A or AA) and 51 are B-rated (B,BB,or BBB) .
China’s SOE restructuring fund (中国国有企业结构调整基金) that focuses on state-owned enterprise restructuring made its first investment into Chinese SOE called Metallurgical Corporation Of China. The investment was 96 million yuan through private placement and it would be used for the corporate restructuring and cutting over capacity. On September 26 last year, the SOE restructuring fund was set up in Beijing. Ten central SOEs invested 350 billion yuan in this fund.
The Asset Management Association of China has recently released a new regulation on new joint ventures. The new regulation requires that overseas asset management businesses should be independent from their domestic activities. Different types of assets should be in different custodian accounts to avoid conflict of interest. With regards to the corporate structure, the private equity house should point out whether it has onshore subsidiaries, branches or related businesses.
22 securities companies have disclosed their financial performance in 2016. Citic Securities leads the table with 7.5 billion yuan net profit, followed by Guotai Junan Securities and Guangfa Securities with 7.4 billion yuan and 6.2 billion yuan respectively. However, Chinese securities houses have seen significant drop in profitability in 2016. Half of those 22 securities that released their data reported a 50% decline in their net profit.
The China Banking Regulatory Commission (CBRC) has disclosed the latest data on Chinese banks. The average NPL ratio increased to 1.81% and the average coverage ratio decreased to 175.5% in December. The NPL ratio was the highest over the past seven years. In a meeting held by CBRC on January 10, risk management once again was cited as the main focus in 2017.
Following China National Petroleum Corporation and China Railway Corporation's announcement on their plans on SOE reform, China Southern Airlines disclosed its plan to introduce strategic investors into its organization. Investors will include leading technology companies.
NDRC (National Development and Reform Commission) stated that it would speed up their efforts regarding sector overcapacity in 2017. The NDRC aims to increase the industries scheduled for production reduction. The targeted supply cut in 2017 is planned to be twice as much seen in 2016. New industries to be targeted by the NDRC are cement, glass, electrolytic aluminum and ship making.
2016 was not a good year for private equity products. According to Chinese media, private equity products invested in equities reported an average loss of 6.72%. Less than 25% of those equity-invested private equity products have reported a positive return. However, over 90% of private equity products invested in bonds has seen a net profit.
Tencent's Wechat officially launched a new in-built function called "mini program", which is regarded as tool that could render a number of mobile phone applications redundant. Users can easily get access to popular Chinese applications such as Didi, Ctrip and Meituan without installing those applications manually. Instead, people can find those applications through their search engine in Wechat and open them inside Wechat. It is expected that the new function is aimed to enhance the O2O and payment ecology of Wechat.
According to Chinese media, from 2006 to 2016, the CSRC (China Securities Regulatory Commission) reviewed 2230 IPO applications, 1842 of which were approved. CICC, Citic Securities and China Galaxy Securities led the league table of total fundraising with 335 billion, 273 billion and 142 billion yuan respectively. In terms of IPO deals, Guosen Securities, Ping'An Securities and Guangfa Securities are the top three with 199, 162 and 130 projects respectively.
Since 2016, the CSRC (China Securities Regulatory Commission) has been overseeing the China's capital market extremely closely. For the whole year of 2016, the CSRC has issued 218 punishment letters, 21% up from 2015. Those punishments include violations of insider trading, market manipulation and insufficient information disclosure. It is likely that this trend will continue in 2017. In the first week of 2017, CSRC again punished four listed companies involved in insider trading.
Just days after China Railway Corporation announced its reform plans, another state-owned company, China Railway Corporation announced that it would undergo a restructuring exercise. The plan states that the company will adopt a modern corporate structure to enhance its efficiency. Seven industries including power, oil, gas, steel, aviation, telecommunication and defense were cited as industries that would be reformed in 2017. Currently, two out of the seven industries have shown interest in the reform scheme.
China has expanded its pilot value-added tax reform across the country over the past year. In 2017, the Chinese MOF (Ministry of Finance) will further enhance the regional tax scheme and include more taxable activities in the tax reform. MOF will also speed up the legislation on government budgets, debt, expenditure, PPP projects, asset valuation and accounting.
Shell companies in the A-share market have been favored by a lot of institutional investors for their speculative or backdoor listing purposes. Chinese analysts believe that shell companies have distorted valuation of the A-share market. This is one of the main obstacles for China when it comes to introducing a IPO registration system. Overvalued shell companies are not able to exit the A-share market because there are always buyers looking to acquire them. When acquired some Chinese companies don’t even have a sound plan in managing their shell company purchases.
The CSRC (China Securities Regulatory Commission) has recently announced that Kee Ever Bright Decorative Technology failed its M&A application due to the lack of justification of its expected net profit. In 2016, 24 M&A applications from listed companies have been turned down. It is expected that a stricter review of M&A applications will continue in 2017 to ensure market stability.
The NDRC (National Development and Reform Commission) issued a development plan for five provinces including Henan, Hebei, Shanxi, Anhui and Shandong. The plan aims to promote the economy within China’s inland provinces. In the plan, NDRC states that Zhengzhou will be the economic center in China and the nearby cities will be satellite cities.
Sun Jiwen, a spokesperson for China’s Ministry of Commerce said in a conference that China has faced a historical number of trade conflicts. Half of those conflicts involve China's steel industry. According to Sun, in 2017 China and Australia will lower the tax trade barriers between each other according to China-Australia’s recent free trade agreement. The involved products include steel products, silk products, meat and seafood.
Compensation reform has been considered an essential part of China’s SOE reform. The reform was introduced in 2015 and focused on three components; base salary, incentives and bonus based on duration of employment. On December 29th, SASAC (State-owned Asset Supervision Administration Commission) disclosed annual compensation of 111 senior managers within several SOEs. The average pay of those managers is 500,000 renminbi to 700,000 renminbi. Two senior managers from China Merchants Group lead the table with 1.2 million renminbi in annual compensation.
China Insurance Regulatory Commission (CIRC) issued a new official guidance towards insurance companies. Under the new guidance, insurance companies are not allowed to issue speculative products to retail investors. The guidance is seen as an attempt to curb aggressive investments from insurance companies.
Following yesterday's report on China's increased capital controls, Chinese media further disclosed that citizens who move capital out of China from different accounts could face a 30% penalty on the amount they transfer out. Those who violate the rules will be by SAFE (State Administration of Foreign Exchange) and will not be able to enjoy a US$50,000 exchange quota for 2 years. In addition, violators may even face an AML (Anti Money Laundering) investigation from the government.
The People's Bank of China has recently released a new regulation on foreign exchange for Chinese citizens. Under the regulation, Chinese citizens should now have to fill in an application form when applying for foreign currencies. In addition, investment in real property, securities and investment-link insurance are prohibited. Aside for those prohibited activities, people can still purchase as much as US$50,000 per year.
During China’s annual Central Economic Work Conference, which discusses SOE reform plans, the country’s railway industry for the first time was officially included onto the list industries scheduled for future reform. According to Chinese media, the China Railway Corporation will participate in a debt to equity swap. Chinese analysts expect that the Chinese railway industry will benefit from the reform process.
According to Chinese media, the northbound link of the Shenzhen-Hong Kong stock connect has seen a net inflow of 7.318 billion yuan for the past month. Northbound stocks has been more attractive than the southbound stocks for the past month. Gree, Midea and Wuliangye are the three most popular stocks on Shenzhen stock exchange with a total inflow of 3.64 billion yuan, 1.53 billion yuan and 1.01 billion yuan respectively over the past month.
On December 29, CIRC (China Insurance Regulatory Commission) released exposure draft on shareholding management methods of insurance companies. The new draft adjusted the shareholding proportion limit of a single shareholder in one insurance company from 51% to 33%. The CIRC also set many other restrictions for insurance companies’ shareholders in this draft. According to Chinese media, a number of insurance companies did not focus on their core competencies such as “to hedge against the risk of a contingent or uncertain loss.” Capital from the insurance companies still hold a significant share in the A-share market in 2016 with stakes in at least 668 listed companies’ consisting of 71.2 billion shares.
On December 29, the PBOC (People’s Bank of China) announced that it was planning to add 11 new currencies into the currency basket of the renminbi exchange rate index in CFETS (China Foreign Exchange Trade System) starting January 1 2017. Currencies include the South African rand, the South Korean won, the United Arab Emirates dirhams, Saudi riyal, Hungarian forint, the Polish zloty, Swedish krona, Norwegian krone, Danish krone, the Turkish lira and the Mexican peso. After this adjustment, the total number of CFETS basket currencies will increase from 13 to 24, and the weight of US dollar will decrease from 0.2640 to 0.2240.
As of December 29, the CSRC (China Securities Regulatory Commission) approved 45 IPO plans this month representing the largest monthly IPO approval amount in 2016. Moreover, 5 IPO plans have been rejected in December. In order to increase transparency, the CSRC also disclosed articles to explain why certain companies did not obtain approval. According to Chinese media’s there are nine major problems of why these enterprises were rejected. This includes significant dependency on affiliate company, disputes on patented technology, questions on the company’s capability of sustained profitability, compliance etc.
According to Chinese media, the total outsourcing capital scale of China’s large banks is predicted to continue grow in the next year. In an effort to bolster their anti-risk capability. Banks such as ICBC (Industrial and Commercial Bank of China), CCB (China Construction Bank), CMB (China Merchants Bank) will be looking to increase their outsourcing. In 2016, ICBC and CMB’s total scale of outsourcing capital was at 150 billion renminbi and 100 billion renminbi respectively.
Recently, the PBOC (People’s Bank of China) announced that financial institution’ OBS (off-balance sheet) activities will be involved into MPA (macro-prudential assessment) starting the first trimester of 2017. According to Chinese media, banks’ OBS activities grew significantly in recent years. The enhancement of OBS supervision aims to support the real economy in the long run.
On December 28 the PBOC denounced news that the renminbi would further weaken to 7 renminbi against US dollar via’s Weibo channel. The PBOC mentioned that till December 28, the on-shore renminbi exchange rate against USD was holding steady around 6.9500 to 6.9666. The mispricing was initially shown on local finance platform and then was being reposted by a number of Chinese domestic finance websites.
On December 28, the CSSC (China State Shipbuilding Corporation), Agricultural Bank of China, Bank of China, China Construction Bank, China Everbright Bank, and Industrial Bank signed agreement to set up a 30 billion RMB fund to support the country’s cruise industry. The duration of this fund will be seven years with a three-year extension period.
On December 26, the NDRC (China’s National Development and Reform Commission) announced that it was planning to promote asset securitization on infrastructure PPP (Public-Private-Partnership) projects in each province. According to Chinese media, asset securitization such as shares being converted into cash will increase the liquidity of these PPP projects. They predict that local governments, which have good public credit and plenty of financial resources, will look to promote PPP projects in future.
Recently Mr. Zhou Liujun, director of foreign investment and economic cooperation department of Ministry of Commerce said in an interview with Chinese media that the next step for promoting and regulating Chinese enterprises’ overseas investment was to effectively disclose new policies. Mr.Zhou mentioned that the goal for the new legislation was to screen out enterprises with reasonable qualities and help them expand business abroad in a stable and healthy way.
According to Chinese media, the non-tradable shares held by c-suite executives of 61 A-share listed companies will have permission to be traded this week. The total market value of non-tradable shares held by company executives in the first three months of 2017 will be around 200 billion renminbi per month. The allowance of non-tradable shares brings further market concern that investors may reduce the holdings significantly if executives start selling their held stakes.
Recently, Guohai Securities admitted that the company used fake signatures when conducting bond trading for around 16.5 billion renminbi worth of bonds. Guohai Securities used an off-balance-sheet leverage method when trading bonds with 22 financial institutions, which is a grey area that is not specifically regulated by the government. In December, these leveraged bonds decreased materially, and now the 22 financial institutions initially involved are asking Guohai to take responsibility for the loss. The CSRC (China Securities Reguatory Commission) has settled the dispute in order to sustain the integrity of the domestic bond market. According to Chinese media, this incident is result of an incomplete market maker system in China. The next step for China's regulators will be to disclose relevant policies to regulate this system.
On December 23, the NDRC (National Development and Reform Commission) disclosed its 13rd Five Year Plan on Renewable Energy. The new investment on China’s renewable energy which includes water, wind, solar, biomass, geothermal and ocean energy will cost around 2.5 trillion renminbi. According to the plan, new investments on solar energy will be 1 trillion renminbi, and new investments on hydro and wind power will be 500 billion and 700 billion renminbi respectively.
On December 21, CNPC (China National Petroleum Corporation) approved its reform plans on introducing private shareholders and marketization within the company. The chairman of CNPC said that the company has already introduced private shareholders via a restructuring reform, joint-venture and cooperation in certain levels. CNPC’s next step will involve refining its structures on equity and corporate governance.
According to Chinese media, the central government announced in a conference yesterday that it was aiming to prevent asset bubbles. It was the fourth time that representatives of the central government mentioned that they were looking to conduct measures on restraining asset bubbles this year. Moreover, Chinese media has already reported that asset bubbles do exist within the stock market, banking and real estate industry. As well as an overvalued renminbi and local government debt, the excessive price of asset is one of the major issues that the government needs to face in 2017.
According to Chinese media, as of 21 December, only 19 listed companies disclosed back-door listing plans in year 2016 compared to 48 recorded last year. The dramatic decrease is the result of changes in China’s policy environment. In September 2016, the CSRC (China Securities Regulatory Commission) announced new regulations on reform plans to curb the speculation of listed companies.
On December 21 the PBOC (People’s Bank of China) executed a 210 billion renminbi reverse repo aiming to reduce the pressure on market liquidity. According to Chinese media, the liquidity squeeze of the last several months was the result of fluctuations in the FX market. The stronger US dollar resulted in increased capital outflows and therefore the PBOC used a large proportion of fund outstanding in order to maintain a stable renminbi.
On the 19th of December, after 20 months suspension from HKEX, Chinese real estate developer Kaisa Group (1638.HK) admitted that the company concealed around 30 billion in renminbi liabilities. The Kaisa Group nonetheless highlighted that the behavior conducted by its former staff and was not authorized by the current management.
The State Council of China recently released a 13th Five Year Plan on National Strategy. According to the plan, industries including banking, insurance and securities firms will be more accessible to foreigners. The plan also mentioned further encouragement on foreign investment in advanced manufacturing high energy conservation and environment protection. In addition to east China, foreign investment on mid-west and northeast China will also be encouraged. The plan also highlighted to further support Hong Kong as a hub for off-shore RMB services and international asset management.
On the 19th of December the CASS (Chinese Academy of Social Sciences) disclosed its suggestions on the future of China’s economy in 2017. Suggestions include reducing the tax burdens on enterprises. According to Chinese media, the private sector in China bears a heavy tax level. For instance, the comprehensive tax on Chinese manufacturing companies is 35% higher than American companies in the same industry. As a result of avoiding heavy tax payment domestically, a number of private sector companies are keen to invest into overseas markets next year.
According to Chinese media, SAFE（State Administration of Foreign Exchange）will conduct research on long-term reform measures regarding cross-border transactions, including cross-border asset transference, the improvment management on domestic foreign exchange loans and the standards of overseas institutions that are issuing bonds domestically. SAFE also says that these measures will aim to improve the balance of international payments, as well as to maintain the stability of the foreign exchange market.
On the 18th of December, Chinese real estate company Vanke signed a termination agreement with the Shenzhen Metro on its restructuring plan. According to Vanke’s recent disclosure, its stakeholders were unable to reach a consensus on a specific plan for the transaction. Moreover, Vanke was unable to disclose information in a timely accordance with the CSRC’s (China Securities Regulatory Commission) new regulation on major assets restructuring.
On the 19th of December, the CSRC (China Securities Regulatory Commission) announced new regulations on managing the security and futures market. The new regulations highlighted special protections to general investors. Moreover they specified that different investors should be classified according to the unified standards and requirements. New regulations also mentioned that products of securities and futures should be graded appropriately. According to Chinese media, this new regulation aims to protect small and medium sized investors. The new regulations will come into effect on 1st July 2017.
The recent sluggish bond market in China has resulted in volatility to the bonds of Chinese securities companies. According to Chinese media, some Chinese securities companies such as China Dragon Securities and Sealand Securities have defaulted on their bond transactions. Both securities companies in question have denied their defaults. The US rate hike is also considered as a key reason for the price drop in China's bond market.
CBRC (China Banking Regulatory Commission) recently issued a drafted guidance on the collateral management of commercial banks. The guidance provided detailed requirements on the collateral collected by commercial banks in terms of valuation, pressure test and classification. The guidance is aimed to enhance the risk management capability of commercial banks.
According to Chinese media, NDRC (National Development and Reform Commission) stated that they will punish a Sino-US joint venture automobile company at the end of this year, the company has been accused of attempting to monopolize the market by abusing the bargaining power they have with their suppliers. The NDRC has not disclosed the name of the company in question. Most recently the NDRC has punished Audi and Chrysler for monopolistic activities regarding their own respective suppliers.
As one of the top four cities in China, Shenzhen is looking to set up funds totaling 500 billion yuan (72.4 billion USD) to participate in China’s ongoing SOE reform. Funds will invest in Shenzhen SOEs and will own significant stakes in those SOEs. Currently, 75% of Shenzhen SOEs have seen private investors owning their stakes, as a result of Shenzhen government's effort in attracting strategic partners and investors.
Following CSRC's (China Securities Regulatory Commission) criticism on aggressive insurance companies, the CIRC (China Insurance Regulatory Commission) also stated in a meeting that they would penalize insurance companies involved in hostile takeovers. According to Xiang Junbo, chairman of the CIRC, the licenses of those insurance companies could even be revoked if they still refuse to follow CIRC's window guidance. The reiteration is to prevent insurance companies from abusing their capital and aggressively buying stocks from the secondary market.
According to Chinese media, CIRC will issue a new regulation to restrict insurance companies aggressive investment in the capital markets. The new regulation lowers the maximum proportion of mid-term and long-term insurance products to total products sold to customers by insurance companies. The new regulation also lifts the minimum coverage to premium ratio from 120% to 160%. The new regulation is expected to be effective in April 2017.
PBOC (People's Bank of China) has recently held a conference call with various government departments. During the call, PBOC vice governor Pan Gongsheng stated that since PBOC started to closely monitor fintech activities, the overall risk of fintech industry has been well controlled. PBOC instructed government entities to continue overseeing fintech companies in a bid to crack down on violations and avoid high level of risk during the next phase of China’s development.
PBOC has approved NAFMII's (National Association of Financial Market Institutional Investors) drafted regulation that allows non-financial institutions to issue ABNs (Asset Backed Notes). Under the regulation, issuers should employ SPV (Special Purpose Vehicles) during an ABN issuance. NAFMII will monitor the SPV. The regulation is expected to enhance the liquidity of non-financial institutions. International Far Eastern Leasing issued the first ABN under the new scheme in early June.
According to Chinese media, the National People's Congress did not include a modified securities law in their agenda during their last meeting this year. This in turn means that the Standing Committee of the National People's Congress will not discuss new development on the country’s IPO registration system. The new system was devised to speed up the IPO process by curbing unnecessary manual reviews in IPO applications.
PBOC (People's Bank of China) announced that the Agricultural Bank of China’s Dubai branch will be the mandated renminbi clearing bank in UAE. The announcement was based on a joint-memo earlier released between the PBOC and the central bank of UAE. According to Swift, the UAE is the most active country adopting renminbi in Middle East.
PBOC approved seven new currencies to directly exchange with the renminbi in China’s Interbank FX market. Those currencies include Hungarian Forint, Polski Złoty, Danske Kroner, Mexican Peso, Turkish Lira, Norwegian Krone and Swedish Krona. All qualified participants in China interbank FX market will now be allowed to quote and trade all currency products including spot, futures and swaps with respect to the seven new currencies.
Jiang Yang, vice chairman of the CSRC (China Securities Regulatory Commission) stated in a speech that the CSRC will continue to support domestic M&A as a way to consolidate the industries within China. Since this December, the CSRC has approved eight M&A deals unconditionally and 4 conditionally. Of all the 249 M&A applications in 2016, 91.16% have been approved by CSRC. The approval rate is still considerably high despite CSRC's new M&A regulation issued in September this year, which is quoted as the "historically strictest M&A regulation" by Chinese media.
Sinosteel Corporation, a Chinese SOE, signed an agreement on a debt restructuring program with a group of banks including Bank of China, Bank of Communication, China Development Bank, Agriculture Bank of China, The Export–Import Bank of China and Shanghai Pudong Development Bank. Sinosteel has recently faced temporarily financial distress and it plans to restructure their debt through convertible bonds and debt to equity swaps. Currently 44 financial institutions are participating in the country’s debt restructuring program.
On December 8th the Shanghai notes exchange was officially launched. The notes exchange will act as an integrated platform offering trading, settlement, custody and information service to investors. The new notes exchange will enhance the transparency and efficiency of China's notes market as well as the financial market.
Jiangsu Rutong Petro-Machinery Co, Tibet Aim Pharm and Tibet Gaozheng Explosive Co are some of the new companies now listed on China’s A-share market. The Chinese stock market now has more than 3000 companies. This represents a new milestone for the A-share market, which only had 1000 companies, listed in 2000. As of December 8th, the total fund raising through the A-share market YTD was 1.54 trillion yuan, close to the number for the whole year of 2015.
The merger of Baoshan Iron & Steel and Wuhan Iron And Steel Company has been officially approved by CSRC (China Securities Regulatory Commission). In addition, the MOF (Ministry of Finance) says that it has concluded its anti-trust investigation of the two companies. Following the merger, the combined company will have a production capability of 60 million ton steel per year, making it the largest steel company in China and second largest in the world. But due to the number of steel producers in China, the market share of the combined company is only 7.5% of the overall steel market in China.
The People’s Bank of China (PBOC) announced that at the end of November, the country’s FX reserve had declined to US$3.05 trillion a drop of US$69.1 billion compared to October. This was also the largest decrease since January. China is now facing both depreciating renminbi and capital outflow, which creating challenges for China's future monetary policies.
Shanghai government announced that it successfully issued a 3 billion yuan offshore bond in the Shanghai free trade zone, with an interest of 2.85%. As a result, the Shanghai FTZ becomes the third largest bond market in China besides the China interbank bond market and the exchange market. While it is an offshore bond where the capital is all from the offshore market, issuers and investors should follow domestic regulations and settlement procedures.
National Council for Social Security Fund announced 21 mandate asset managers for its pension fund. Those firms include, ICBC, Credit Suisse Asset Management, Taikang Asset Management, Guangfa Fund Management and other AMCs and insurance companies. Many of those also appeared in the list of mandated asset managers for the government’s social security fund. Last week, the council also appointed ICBC, Bank of China, Bank of Communication and China Merchants Bank as the custodian banks of the pension fund.
According to Chinese media, as of December 4th, only 49 out of 178 PE funds invested in NEEQ (National Equities Exchange and Quotation) have reported a net profit. While the most profitable PE fund in NEEQ gained a yield of 214.6% YTD, 26 funds lost its value by more than 20%. Chinese analysts attribute the underperformance of those PE funds to the bearish NEEQ and its lower valuation.
As of November 28th, 19 provinces disclosed their expected salary growth. On average, the growth is slowing down by different levels. Chinese government officials explained that the decline in growth was due to slower GDP growth. The provinces experiencing financial difficulties such as Liaoning and Heilongjiang province have not yet disclosed the data, largely due to their financial conditions.
CIRC (China Insurance Regulatory Commission) recently announced that it forbids Qian Hai Life Insurance from issuing new investment link products for the next three months. In September this year, CIRC issued a new regulation, which regulates the insurance premium and settlement interest rate of those investment link products. The new round of oversight by the CIRC is likely to ease the price competition between Chinese insurance companies and enhance their liability management capabilities.
State media published an article suggesting the next stage of China's financial reform. In a bid to further open the capital market, the media suggested additional quotas in QDII, QFII, and RQFII program. It also encourages more Chinese companies to be listed on the Hong Kong stock exchange and set up offices in Hong Kong.
Chinese media reported the first day performance of Shenzhen/Hong Kong Stock Connect. For the northbound link, Gree, Midea and Hangzhou Hikvision Digital Technology have seen largest trading volume, with a total of 372, 232, 208 million yuan respectively. For the southbound link, BYD, Chinasoft International and Goldwind Technology led the league with a total of 130, 73.7, 32.8 million yuan respectively. Noticeably, those popular stocks in the southbound link are mostly A-H shares indicating that there is a large gap between the price onshore and offshore stock exchanges.
CSRC (China Securities Regulatory Commission) issued a drafted regulation on AMC (asset management companies), which aims to regulate all AMCs including fund companies and subsidiaries of securities companies. Under the new regulation, each AMC should submit an annual qualification check report to the CSRC on April 30th. The report should include all details that can prove the company's qualification.
Liu Shiyu, chairman of CSRC criticized aggressive asset managers in a public speech last week. Recently, the Chinese A-share market has seen a lot of aggressive asset managers especially in insurance companies which bought significant amount of shares of listed companies. Those insurance companies involved in hostile takeover activities have a lot of excess capital and would like to gain controlling power of some listed companies. According to Liu, those aggressive takeovers did harm the Chinese financial market and pose a threat to China's current regulatory framework.
According to Charles Li, CEO of Hkex, it is expected that ETF products will be available soon in the stock connect between mainland China and Hong Kong. It offers a new approach for Chinese investors to invest in overseas companies that are not listed in Hong Kong stock exchange through those ETFs. According to Shenzhen Stock Exchange, it is now already ready for the ETF option products.
Data from SAFE (State Administration of Foreign Exchange) shows that as of end of June, China outbound securities investment have amounted to US$312 billion. Equity investment accounted for US$186.7 billion while the rest went to bond investments. The top three jurisdictions favored by Chinese investors were the US, Hong Kong and the Cayman Islands receiving US$116.6 billion, US$72.4 billion and US$20.3 billion respectively.
The Ministry of Finance issued two regulations on December 1st, stating that local governments should have a stable repayment source for their bonds. Although the principal of those bonds can be paid back through refinancing, MOF for the first time now prohibits local governments from issuing new bonds to pay back their interest payments. The regulations also requires that the amount of debt for each province should not exceed the maximum amount granted by the State Council.
According to Chinese media, the Ministry of Finance is considering to legislate value-added-tax at an appropriate time. Currently, VAT reform is just on a pilot basis with four different tax rates applicable for different industries. MOF is also looking to simplify tax categories and bring more tax benefits to Chinese corporates.
Shanghai Ministry of Finance issued an official regulation on bond issue in the Shanghai FTZ signaling that the first local government bond to be issued by the Shanghai government in Shanghai FTZ will soon happen on a pilot basis. The Shanghai government will be the issuer and the Shanghai ministry of finance will arrange the issue. Foreign investors will be allowed to subscribe in the Shanghai government bond.
Chinese media reported that the CSRC (China Securities Regulatory Commission) and Ministry of Public Security will start a new round of market review in a bid to crack down stock manipulation and insider trading. Some A-share listed companies have taken advantage of asymmetric information to manipulate its stock price with securities companies. It is the second time that the CSRC is undergoing a market review. The first instance was to deal with IPO fraud issues and information disclosure.
Since telecommunications company China Unicom disclosed that it will be included in the SOE reform, its stock price has gone up by over 60%. The market reacted positively also due to its new partnership with Baidu, Tencent and Alibaba. The market expects China’s internet leaders may have a strategic stake in this state-owned telecommunications company.
The Chinese SAFE (State Administration of Foreign Exchange) reiterated on social media that it still supports foreign direct investment despite a depreciating RMB. But ODI should be real trade instead of speculative investment or even purely transferring capital outside of China. And SAFE will continue to crack down the fake trade.
Chinese media reported that ICBC, BOC, BOCOM and CMB have been mandated as the custodian banks of pension funds into A-share market. The MOF (ministry of finance) is also in the process of working out detailed accounting rules of the funds. It is expected that mandated asset management companies or securities companies will be also announced in the next few days.
Following the listings of securities companies such as Orient Securities and Everbright Securities, China Securities is likely to become the fourth Chinese securities company to IPO on the Hkex. China Securities submitted their IPO application to the Hkex in late September and it is expected to be listed in early December. According to the prospectus, China Securities plans to raise at most 1.06 billion USD with cornerstone investors expected to purchase over 60% of the stocks.
In a bid to better manage the risks emerging from China’s derivatives market, the China Banking Regulatory Commission (CBRC) issued a drafted regulation on counterparty risk of derivatives products to commercial banks. In the new regulation, CBRC requires commercial banks to adopt an appropriate equation provided by CBRC to calculate the risk exposure of derivative products. It also provides some other equations in estimating the risks.
CBRC has recently issued an official guidance to Chinese banks requiring Chinese banks to employ independent legal advisors to oversee bank risks. The legal advisors will be responsible for legal issues of the banks and should not be affected by other departments. The new guidance is expected to enhance the overall legal system within the banking sector.
The (People’s Bank of China) PBOC Shanghai Branch issued a new circular on FT account in Shanghai. Under the new circular, all Shanghai technology companies including startups are allowed to open a FT account. Foreign individuals employed by local or international technology companies in Shanghai are also allowed to open a personal free trade account in Shanghai and enjoy cross-border financial services. The new circular also allows MNCs to adopt a cross-border RMB cash pool in the FTZ to provide services such as cash pooling and centralized payment to its subsidiaries.
SASAC (State-owned Assets Supervision and Administration Commission) will hold a meeting with SOEs and make a schedule for the next phase of SOE reform. NDRC recently announced seven SOEs will participate in the reform programme representing the strategic sectors including power, oil, gas, railway, airline, telecommunication and defense. Participating SOEs will start allow private ownership in their shareholder structure. SOEs participants include China Eastern Airline, China Unicom, China Southern Power Grid, Harbin Electric, China Nuclear Engineering and China CSSC. The most noticeable company in this round of SOE reform will be China Unicom given its size and strategic importance in the telecommunications market. The government hopes this will become a blueprint further SOE reform.
Yin Weimin, Minister of Ministry of Human Resources and Social Security, said in a public speech on November 18th that a specific plan on increasing the retirement age will soon be released. According to Yin, the drafted plan will finalized towards the end of 2016. However, the retirement age will not be increased directly to the target age. Instead, according to the Ministry of Human Resources and Social Security, the retirement age will be increased a few times before it reaches the suitable age target.
According to Chinese media, China is speeding up drafting its guideline for personal tax reform. The new guideline will come out by the end of 2017. The key reform will be a broader recognition of tax deductible items. The education expense and the first mortgage interest expense is expected to be deducted from personal taxes Currently, under China's tax regime, different activities apply to different tax rates. The goal of the tax reform is to ease the burden on low-income citizens.
According to Chinese media, the Shanghai free trade zone registered around 1330 new foreign companies in the first half of 2016. More than 50% of all foreign companies that chose to set up operations in Shanghai sought the Shanghai FTZ. New foreign companies accounted for over 20% of all new companies, up from 5% three years ago. The attractiveness of the Shanghai FTZ is largely due to its continued regulatory liberalization. For example, the FTZ negative list has been gradually been shortened from 190 items in 2014 to 122 in 2015.
China’s Securities Regulatory Commission (CSRC) has recently disclosed its first punishment on a Chinese participant in Shanghai/Hong Kong Stock Connect. The firm in question was accused of manipulating stock prices and trading volumes, by using their two stock accounts in mainland China and Hong Kong. Through the manipulation, they gained an illegal profit of 300 million yuan. The CSRC reiterated that it would keep a close eye on the stock market and spare no efforts in cracking down on illegal activities.
As the launch of the Shenzhen/Hong Kong Stock Connect draws close, the Shenzhen stock market is ready to see more institutional and retail investment. Chinese media reports that, Vanke, China Merchants Shekou Industrial Zone, Shenzhen Overseas Chinese Town, Yango Group, and HuBei Fuxing Science and Technology are some of the top stock picks for financial institutions. According to the Shenzhen Stock Exchange, the net profit growth of Shenzhen listed companies that are available in the Shenzhen/Hong Kong Stock Connect is 16.1% on average in Q3, compared to 1.7% growth in the overall A-share market.
According to Chinese media, for the first ten months in 2016, Fujian province has seen over $10 billion ODI (outward direct investment), 1.3 times compared to last year. The Fujian FTZ, however, has seen 14.5 times growth in ODI during the same period. The majority of projects invested by Fujian enterprises were in Hong Kong, Indonesia, Singapore, Australia and Cayman Islands. Bilateral capacity agreement accounted for over 40% of the total amount of investment.
China' bond market has recently seen an increase in 10-year government bond yield. Currently, the yield has exceeded 2.9% and analysts expect it to exceed 3% by the end of this year. The increase in government yield is a reflection of tightening money supply within China. In the face of a difficult economic environment, PBOC (People's Bank of China) is now using more MLF (medium-term lending facilities) and less reverse-repurchase agreement to maintain the liquidity level in the money market.
Xuan Changneng, assistant chairman of CSRC (China Securities Regulatory Commission) stated in a public forum that currently, around 30 Chinese internet companies have been listed in A-share market, with a total market cap of 610 billion yuan. In 2015, the CSRC approved 44 M&A transactions involving internet companies total deal value at around 130 billion yuan. According to Xuan, given higher risks and a lack of tangible assets among Chinese internet startups, a comprehensive and multilayer IPO capital market can serve the purpose of funding those new comers.
According to Chinese media, CCB (China Construction Bank), SASAC (State-owned Asset Supervision and Administration Commission) of Shandong Province and Shangdong Energy Group have signed an agreement to execute a debt-to-equity swap. The amount of the swap is around 21 billion yuan. Currently, CCB has been involved in many debt-to-equity swap projects, with a total amount around 95 billion yuan. According to CCB, they have talked to more than 50 companies regarding debt-to-equity swap deals.
The asset management association of China has recently released a report of Chinese fund investors in 2015. The report reveals that 68.5% of the investors saw capital gains from their investment in financial assets and 68.2% of the investors made profits from their fund investment. Noticeably, 75% of the investors say that they are looking at foreign market and they will consider overseas exposure.
As a result of the depreciation of the renminbi and the upcoming Shenzhen-Hong Kong Stock Connect, fund companies have recently launched several new QDII funds to cater the increasing demand from retail investors. As of November 16th, 15 new QDII funds have been introduced, raising a total of 648 million yuan. Currently, there are 120 QDII funds in the market. According to the CSRC, there are at least 11 pending applications of new QDII funds from 8 fund companies.
Chinese technology company LeEco is currently facing a shortage in its cash flow. Recently it announced that more than 10 investors are guaranteed to invest US$600 million in its electronic car product line. The new investment has released pressure on LeEco's finances to a large extent. Noticeably, the major investors are LeEco's CEO Jia Yueting's classmates.
State GDP data from China reveals that around one third of local provinces did not reach their GDP target in accordance with the country’s thirteenth five-year plan. Tibet, Chongqing and Guizhou lead the GDP growth league, growing at 10.7%, 10.7% and 10.5% respectively. Liaoning province is the only province that has seen a negative growth rate in first three quarters, shrinking by 2.2%.
Chinese media has reported that the CSRC (China Securities Regulatory Commission) is speeding up its review process of IPO applications. The second half of 2016 saw 131 companies approved by the CSRC while only 70 companies were approved in the first half. However, it doesn’t mean all companies are able to get listed in A-share market. Some may retrieve their applications in the queuing process and some applications may have been even halted by CSRC due to disclosure issues.
In a bid to attract more bilateral investment and trade from Canada, CFETS (China Foreign Exchange Trade System) now allows the direct exchange of Renminbi to Canadian dollar in the interbank FX market. Market makers will take the role to provide the quoting service and liquidity to the market. The exchange rate of Renminbi and Canadian dollar will be based on the reference rate of the US dollar against Renminbi and US dollar against Canadian dollar.
State council stated in an official regulation that it would no longer bail out local government if they fail to fulfill their debt obligations. Under the new regulation, local government will be responsible for paying their own debt and once the interest expense exceeds 10% of the fiscal expenditure, those local government will be forced to restructure their budgets. The new regulation will hopefully allow local governments to be aware of their own financial condition before issuing bonds.
Chinese media reported that the free trade zones in Sichuan, Zhejiang and Hubei province have submitted their plans to the Ministry of Commerce. Seven new provinces will be participating in the third batch of FTZs. Zhejiang FTZ will focus on free trade of commodities; Hubei will focus on economic belt along Yangtze River; Henan will build an international logistics center. According to the MOC, the seven new FTZs will take their regional advantages into consideration and participate in national strategies such as One Belt one Road.
CSRC (China Securities Regulatory Commission) and the Chinese MOF (Ministry of Finance) have recently issued a guidance on futures investors protection fund, a pool of fund contributed by both the futures exchange and securities houses to compensate investors in the event of a securities house default. The new guidance lowers the contribution rate of both futures exchange and securities houses to ease their contribution burden. In addition, under the new guidance the more higher the securities house's credit rating is, the lower the rate of contribution. According to Zhang Xiaojun, the spokesperson of the CSRC, the adjustment in the new guidance can lower the operating cost and trading cost of securities houses.
Looking to enhance the security of IT systems in financial industry, CSRC has recently issued a guideline of IT auditing for the securities and futures industry, similar to Code of Ethics & Standards of Professional Conduct in CFA (Chartered Financial Analyst) program. The guideline specifies and regulates more than 3000 auditing activities. The new guideline is applicable to seven categories of market participants including securities companies, stock exchange, futures exchange, futures companies, securities settlement & clearing institutions and fund companies.
CBRC (China Banking Regulatory Commission) recently disclosed financial data of China's banking sector in Q3 2016. The debt level of state-own commercial banks and private commercial banks has increased by 8% and 14.8% YOY respectively. Moreover, net income has risen by 2.83% YOY while both the ROE and the ROA have decreased. Compared to last quarter, the NPL (non-performing loan) ratio has increased slightly by 0.01% to 1.76% and the provision coverage ratio has declined by 0.44% to 175.52%.
On its eighth ever "Singles' Day" event, Alibaba broke trading volume records yet again. In the first 52 seconds the event the trading volume on Alibaba’s system passed 1 billion yuan ($147 million). The first hour of the festival saw trading volume reach 35.3 billion yuan ($5.2 bililon), equivalent to the total volume of the Singles Day festival in 2013. Mobile payments accounted for more than 85% of total sales moreover, 195 jurisdictions were involved in the annual festival.
According to Chinese media, the Shenzhen Hong Kong Stock Connect is ready and the official launch date will be the 21st of November. On November 12th, the trading system will be tested again. Starting from November 11th, the securities companies participating in the program will gradually put their trading system online.
Xiaomi, one of the largest Chinese mobile phone manufacturers, is becoming more influential in the Chinese mobile phone market. Chinese media has stated that at least 20 A-share listed companies are the major suppliers or partners of Xiaomi. Those include Midea, Andon Health, Shenzhen Everwin Precision Technology and Shenzhen O-film Tech. Xiaomi currently targeting to enter high-end market. Whether the company’s strategy will work or not will have a significant impact on those A-share companies.
Data from China’s SAFE (State Administration of Foreign Exchange) shows that at the end of the Q3 2016, net FDI (foreign direct investment) from foreign financial institutions is negative $2.315 billion, meaning that foreign investors withdrew their investment in China more than the amount they invested. On the other hand, the number of net ODI (outward direct investment) in Q3 2016 is $1.679 billion, showing a strong willingness from Chinese corporates in outbound M&A activity. The capital outflow from China is likely a result of a depreciating RMB.
CFETS (China Foreign Exchange Trade System) disclosed data of bond issues in October 2016. CCB (China Construction Bank) leads the table with a total of 48 bond deals, followed by SPDB (Shanghai Pudong Development Bank) and Industrial Bank, with 40 and 34 bond issues respectively. The most active securities firm is China Merchants Securities with a total of seven bond issues followed by China Securities and TF Securities. JP Morgan, Citi and Morgan Stanley are the only three foreign players that underwrote Chinese bonds in October 2016.
As RMB continues to depreciate, more fund companies announced that their QDII (qualified domestic institutional investors) mutual funds are no longer available for investors to purchase. According to Chinese media, currently, over 60% of the QDII funds are not available for purchase at all or not available for large amount purchases. The reason behind this is the lack of FX quota these fund companies can provide to their clients. As of the 7th of November 2016, around 80% of the QFII funds have seen a positive return.
Data from Hithink RoyalFlush Information Network shows that since the beginning of 2015, 549 A-share listed companies have disclosed plans on their employees' stock ownership program. Data reveals that 325 companies have already implemented their programs. Noticeably, 108 of the 325 companies have seen their stock price fall after employees bought company shares. Market analysts expect that those employees will not sell their stocks in a short term as a large proportion of them are the core employees of those companies and essentially support the stock price.
Data from Hithink RoyalFlush Information Network shows that as of the end of Q3, total debt of 136 A-share listed property developers was 4.52 trillion yuan, 20% up from same period last year. The data shows that 15 companies have reported over 100 billion yuan in debt. In order to reduce cash flow pressure, several property developers have started to pledge their stocks in return of cash. Vanke tops the debt league with a total debt ratio of 81%.
As the most important festival for Chinese internet users, the "double eleven" festival introduced by Alibaba not only attracts online vendors but also some fund companies. Some Chinese fund companies have launched special programs where customers can enjoy a lower fee when purchasing mutual funds in their websites. Currently, many of the fund companies have already offered a 60% discount on the subscription fees of those mutual funds. Discounts could increase to 90% during the actual festival. Some companies even waived the fees for their customers.
According to information provider Wind, since June 2016, 54 M&A applications from A-share listed companies have been halted. Nine companies were rejected by the CSRC (China Securities Regulatory Commission) due to violations of regulations such as information disclosure. The remaining 45 companies withdrew their M&A applications due to internal reasons and being unable comply with CSRC regulations.
LeEco, a Chinese technology company that has seen rapid growth in past few years is facing cash flows issues. According to Jia Yueting, CEO of LeEco, the company was expanding too fast and now the core business of the firm is unable to generate positive cash flow. The stock price has decreased by more than 13% since November 2nd. It is expected that LeEco will have to cut employees or prolong the cash consideration cycle in order to enhance its cash flow.
On November 7th, Shenzhen Stock Exchange made two key announcements on its website. One focused on the importance of participating securities houses in being system ready by November 20th. Moreover, IT system of the Shenzhen Stock exchange will be ready on November 14th. As of 6th of November, 144 Hong Kong companies and 125 mainland companies have tested the trading system.
CSRC (China Securities Regulatory Commission) disclosed that for the first nine months of 2016, Chinese IPO applications from 73 companies were either rejected or withdrawn. In the Q3 2016, 56 IPO applications were either rejected or withdrawn. The main reasons for the rejections or withdraws include worsening financial performance, missing the deadline for IPO documents and strategic adjustments in their IPO plans. CSRC stated in the announcement that it will regularly report IPO issues to the public to enhance transparency going forward.
Chinese media has received information from SAFE (State Administration of Foreign Exchange) that it has set up a special path for corporates planning to list in Hong Kong. CMS(China Merchants Securities) and PSBC (Postal Saving Bank of China) were able to attract cornerstone investors through this special path when they made their HK exchange debut several months ago. Under this procedure it takes less time and effort for cornerstone investors to purchase foreign exchange to be used in the purchasing in overseas stocks. The treasurers in both PSBC and CMS admitted that they did benefit from the SAFE ruling.
According to Chinese media, CIRC (China Insurance Regulatory Commission) has required all insurance companies to self-check their investment tangible assets and required them to report to the CIRC by November 15th. Market analysts predict that the self-check is to do restrict the insurance companies to speculate on property markets with premiums. Experts predict that going forward, insurance companies will not be allowed to invest in the property market through trust companies or SAMP (Structured Asset Management Plans).
The Shenzhen Stock Exchange has approved 24 securities companies to participate in the southbound link of the Shenzhen/Hong Kong Stock Connect. Those include Guosen Securities, Essence Securities, Bohai Securities and CICC. The stock connect is anticipated to be launched by the end of this year.
According to UBS’ Q3 interim report the HKSFC (Securities & Futures Commission of Hong Kong) is investigating the equity business of UBS. If HKSFC takes action, UBS will be forbidden to conduct financial advisory activities for a period of time. Chinese media has reported that many of the mainland companies UBS has sponsored with their IPOs have seen worse financial conditions after IPO. Market analysts attribute this to UBS’ part in the manipulation of financial data to boost the success of the IPO listing.
According to Chinese media, CICC will announce its acquisition of China Investment Securities in a few days. If the acquisition is successful, this will shift the domestic landscape of Chinese securities companies. The total asset of the new company will amount to 186 billion yuan. Chinese analysts believe that the potential acquisition will pave the way for CICC to IPO on the A-share market.
For the past month, Laiyifen, a Shanghai food company, has surprised every A-share investor by being the best performing stock on Shanghai Stock Exchange. Since its IPO in October 12th, the stock price has been growing for 17 consecutive days. Out of the 17 days it’s been listed, the stock has reached the 10% daily growth 14 times. The market cap of this company has now exceeded 17.4 billion yuan and the stock price has risen 6 times compared to its initial IPO price.
Alibaba disclosed its second quarter financial report yesterday. The revenue and net income of the company grew 55% and 41% respectively YOY. For the first time since its IPO, Alibaba did not include any GMV (Gross Merchandise Volume) data. Chinese media believes that it may reflect Alibaba's ambition to transition from relying heavily on e-commerce platform to building a digital ecosystem. Noticeably, revenue from its cloud computing unit has increased historically by 130%. This could be a new growing space for Alibaba.
The interim result of CNPC in Q3 (China National Petroleum Corporation) shows that the subsidy it received from the government has doubled its net income. In total the CNPC received a 3.6 billion yuan in subsidies followed by BOE Technology, SAIC and Midea with 1.8 billion, 1.1 billion and 1.04 billion yuan respectively. According to Chinese data provider Choice, 2752 A-share companies have received subsidies in the first three quarters of 2016.
China's interbank market saw 15 CDS (Credit Default Swap) transactions from ten financial institutions including ICBC, ABC and CCB on October 31st. The transactions totaled approximately 300 million yuan in value and involved industries from the gas, oil, power and telecommunication sectors. In addition, NAFMII (National Association of Financial Market Institutional Investors) approved 14 financial institutions to be the dealers of CRM (Credit Risk Mitigation).
According to Chinese media, the Hengqin free trade zone located in Zhuhai has recently signed a memo with the AMAC (Asset Management Association of China) in Beijing. The memo focuses on the regulation of private equity industry in the Hengqin FTZ with the aim of boosting the PE industry within the zone. The cooperation offers a platform to share information and enhance the communication.
CSRC (China Securities Regulatory Commission) and HKSFC (Securities & Futures Commission of Hong Kong) held a seminar on the regulatory issues in Shanghai. According to attendees, the issue of AML (Anti Money Laundering) was raised in the seminar. It is expected that an official guideline on AML will be issued soon as a result of these concerns. In addition, the subsidiaries of Chinese securities companies located in Hong Kong may face stricter oversight from regulators.
According to Chinese media, Citi, Merrill Lynch, Morgan Stanley and Citic Securities have started to work on the Lufax’s Hong Kong IPO. The company is expected to submit its IPO application Q1 2017. During the recent interim result presentation of Ping An Insurance (Group) Company, Lufax’s CEO Yao Bo mentioned that Lufax will spin off from the Ping An group and be listed by the end of 2017.
SSE(Shanghai Stock Exchange) and the SZSE(Shenzhen Stock Exchange) has recently issued a new regulation on corporate bonds. The new regulation lifts the threshold of profitability and asset size. The new rules are expected to cool the property market down by restricting Chinese property developers from issuing bonds to purchase land. Out of all the A-share listed companies, only around half of them meet the requirement of the new regulation.
Chinese mutual funds have reduced their stake significantly in Chinese banks during the Q3 of 2016. The top 5 stocks that have been redeemed by mutual funds include banks such as Everbright Bank, Bank of China, Industrial and Commercial Bank of China, Agricultrual Bank of China and China Construction Bank. Mutual funds are wary of the decreasing net profits of Chinese banks due to the slowdown in the Chinese economy.
SASAC (State-owned Assets Supervision and Administration Commission) recently announced that it has approved the merger of Baosteel and Wuhan Iron and Steel. The new company will now be called Baowu Iron and Steel. Mr. Ma Guoqiang will be the chairman of the new company. Mr Ma was the chairman of Wuhan Iron and Steel before the new company was established.
CSRC (China Securities Regulatory Commission) has recently announced on its website that two Chinese innovative startups have successfully issued their corporate bonds and they will soon be available to trade in SSE. Those two companies are Infovision Optoelectronics and Suzhou Derpin Medical Science and Technology with their coupon rate of 3.88% and 8% respectively. The total size of the two bonds is 55 million yuan and the proceeds will be used for R&D. It is the first batch of Chinese innovative startups to tap the bond market.
As of October 28, several Chinese privately owned commercial banks have disclosed their interim results for Q3 2016. Industrial Bank, Minsheng Bank, SPDB (Shanghai Pudong Development Bank) and CMB (China Merchants Bank) are the top 4 banks in terms of AUM, with 5.82, 5.64, 5.56 and 5.56 trillion yuan respectively. In terms of net profit, CMB is still the most profitable institution followed by Industrial Bank.
Another Chinese SOE is going through bankruptcy proceedings. Zhejiang Communication Investment Group the ninth largest shipping company in China announced that it could not fulfill its obligation to pay back its loans. As of July 2016, the total assets of the company were 5.1 billion yuan while the total liability was 8.4 billion yuan. There is no official plan on the disposal of the company’s assets.
As of 27th of October 2016, 1351 A-share companies have disclosed their Q3 interim results. Compared to the first half, the portfolios of the state-owned investment companies otherwise known in China as the "national team" have not changed much. The “national team” currently holds key stakes in eight financial institutions including Bank of China and Industrial Bank. These financial stakes are equal to 200 billion yuan in value. In contrast, QFIIs have sought to invest in manufacturing companies with solid profit growth. These include companies such as Lanzhou Greatwall Electrical and Henan Pinggao Electric. Currently, Hangzhou Hikvision Digital Technology is the stock favored by most QFIIs. UBS, Morgan Stanley, JP Morgan and Singapore government have stakes in the company holding a total of 244 million shares.
PBOC (People's Bank of China) recently released data on Q3 2016 provincial financing and found that Guangdong overtook Jiangsu to be the top province conducting fundraising activities, raising 1.63 trillion yuan. Jiangsu and Beijing are the second and third, raising 1.44 trillion yuan and 985 billion yuan respectively. The provinces of Tibet, Qinghai and Ningxia saw the least amount of financing activities, with only 70.3 billion yuan, 40.8 billion yuan and 39.2 billion yuan respectively.
The Chinese Ministry of Human Resources and Social Security is expected to arrange a meeting with representatives to discuss the joint management of provincial pension funds alongside a government national agency called the national council of social security fund. Provinces involved include Guangdong and Shandong. In a guidance issued by state council in August 2015, a Chinese provisional pension fund can invest at most 30% of their AUM (asset under management) into the domestic equity market. Chinese media has estimated that the actual number of pension funds in the equity market may be smaller due to the conservative investment nature of some provinces.
The SASAC (state-owned assets supervision and administration commission) recently held a meeting discussing the issues of monitoring overseas state-owned assets. The objective is to avoid the miscalculation of state-owned assets during the government’s nationwide restructuring reform. If left unattended SOEs yet to be restructured may be mispriced. According to SASAC, overseas state-owned assets are estimated to be worth over 12 trillion yuan.
Since the Shenzhen Hong Kong stock connect was approved in August, the Shanghai/Hong Kong stock connect has been quite active. In the months following the announcement more southbound inflow has entered into the Hong Kong stock exchange. In October, the daily inflow in both northbound and southbound was equally active recording nearly 4 billion yuan in trading volumes. Chinese analysts expect that once the Shenzhen/Hong Kong stock connect is officially launched, the demand in those two markets will reach an equilibrium due to a fully mutual openness of the two markets.
The Shanghai FTZ is likely to see its first bond issuance in late November. The Shanghai government will issue a 3 billion yuan government bond with a tenor of three years. According to Chinese media, the proceeds will be used to pay back existing debt. Foreign investors including sovereign and quasi-sovereign entities are allowed and encouraged to invest in this deal.
Yesterday the, NDRC (National Development and Reform Commission) arranged a meeting with 22 coal companies including Shenhua Group and China National Coal Group. The meeting addressed the overcapacity issues within the coal industry. The NDRC urged those approved qualitied coal producers to resume production in the face of increasing coal prices.
Ma Jun, the chief economist at the PBOC (People's Bank of China) said in a public speech that the GDP growth in 2016 will likely be 6.7%. Moreover, the stated that the possible interest rate hike by the US Fed has a limited effect on the RMB exchange rate. The continuous inflow from foreign investors into China's bond market is also cited for stabilizing the RMB exchange rate. He also said the CPI in 2017 will be larger than 2016 and the PPI will turn positive.
Two recent Chinese overseas M&A deals have been slowed down or even been temporarily halted due to tighter regulatory supervision in the target’s home country. Those two deals are FGC's acquisition of Germany-based Aixron, and Chemchina's acquisition of Swiss-based Syngenta. Chinese media attributed the slowdown to protectionism in those countries. Overall, M&A activities from Chinese companies have slowed down during the Q2 and Q3 of 2016, with an acquisition amount less than US$50 billion in each quarter.
According to Chinese media, the CSRC (China Securities Regulatory Commission) has recently arranged a meeting with a group of securities companies to discuss the feasibility of using stocks as collateral. At the moment mutual funds investing into bonds and ETFs are not allowed to be used as collateral assets. In addition, stocks where 50% of its market value is already pledged cannot be used again as collateral in raising funds. As an innovation in the market, financing with securities as collateral has seen a popularity in the A-share market last year. According to Wind, there were 7,604 of these transactions since 2014.
Despite the central government's ambition to boost the economy of the northeastern part of China, the declining population is cited as the biggest challenge to the area’s economic recovery. For the past 20 years issues such as a low fertility rate, aging society and labor force outflow have made it difficult for the three provinces of Jilin, Heilongjiang and Shenyang to maintain its GDP growth.
The CSRC (China Securities Regulatory Commission) recently setup a team for investigating recent IPO violations in Chinese stock market. Five companies involved in the violations include Guangdong Guangzhou Daily Media and Ingenious Ene-Carbon New Materials. This is the first time that CSRC has put together a team to address these IPO violations, showing the organization’s strong wiliness to crackdown on illegal financial activities.
China Foreign Exchange Trade System has recently announced that now 39 more financial institutions are allowed to issue certificates of deposit (CD) in China. These include 36 domestic banks and 3 foreign banks which are OCBC, Standard Chartered and MUFJ. The openness of the CD market is seen as a move to further liberalize the interest rate in China. Currently, 353 financial institutions are able to issue CDs in China.
Chinese media observed that the QFIIs (qualified foreign institutional investors) preferred blue chip A-shares in the third quarter of 2016. Data from Wind shows that more than 60% of the stocks held by QFIIs are listed on Shanghai/Shenzhen main boards. Consumption focused blue chips are the most favored by QFIIs. As of Q3 2016, the most popular Chinese company for QFIIs is Hangzhou Hikvision Digital Technology. UBS, Morgan Stanley, JP Morgan and the Singapore government are some of the top 10 QFII holders with a total of 244 million shares.
China Unicom, one of the largest telecommunication companies in China is expected to see a round of private investors. The potential investors may be internet companies such as BAT (Baidu, Alibaba and Tencent). However, it is not likely that the private ownership will be significant in size and the majority will still be owned by SASAC (State-owned Asset Supervision Administration Commission). The reform is originated and arranged by NDRC (National Development and Reform Commission)
Demand from overseas monetary authorities in purchasing RMB assets is increasing as a result of RMB’s inclusion into the SDR (special drawing rights) basket. Data from CCDC (China Central Depository & Clearing) shows that the new added onshore bonds held by foreign investors was at 50.7 billion yuan, the largest monthly increase since 2014. It is unknown whether those overseas institutions hedge their positions when holding the RMB assets.
According to Chinese media, ICBC’s coverage ratio was at 143% for the first half of 2016, lower than the required rate of 150% for at least two consecutive months. As a result, the PBOC (People’s Bank of China) has deducted marks of ICBC in its regular MPA (macro prudential assessment) towards each commercial bank. MPA is an assessment tool introduced by PBOC in 2016, with seven aspects and 14 evaluating factors. The coverage ratios of ABC, BOC, CCB and BOCOM are 178%, 155%, 152% and 150% respectively, all higher than the required 150%.
According to Chinese media, the PBOC (People's Bank of China) has implemented new regulation on five state-owned banks and twelve private banks, focusing on the surging domestic property prices. PBOC requires the highlighted banks to be cautious in providing mortgages and in controlling the risks within those mortgages. In addition, the PBOC will impose a tighter oversight towards those banks, in a bid to restrict too much capital from flowing into the property market.
The Chinese state council has recently issued an official guidance on fintech industry to control the risk derived from financial innovation. The new regulation prohibits a couple of activities such as P2P platforms setting up cash pools, raising funding illegally and providing loans. Property developers are also prohibited from providing financial services to their clients with the help of P2P platforms. Moreover, internet companies should not provide financial services unless they have obtained a license. In addition, the regulation encourages the public to report illegal issues through an online platform.
China customs has released data of import and export for September 2016. For the first three quarters, the total volume of export and import is 17.53 trillion yuan, 1.9% down from same period last year. In September 2016, Chinese exports were only 1.22 trillion yuan. Around 5.6% down from the same period last year. The trade surplus was only 278.3 billion yuan, 25% down from last September. Chinese analysts expect increased depreciation pressure towards RMB as a result of the underperformance in Chinese exports.
The Chinese state council has issued an official guidance on the debt to equity swap. Under the guidance, “zombie companies” or companies that need government bailouts to operate are prohibited to participate in this program. The conversion price will be based on the stock price in the secondary market. Apart from banks, the "big four" state asset management companies, insurance companies and state-owned investment companies are also allowed to participate in this debt-to-equity swap program.
As negative interest rate become a norm in the financial market, overseas investors have found China's onshore bond market as an ideal place for investments. Data from CCDC (China Central Depository & Clearing) shows that as of September 2016, the Chinese onshore bond market has seen new investment from overseas investors with a total value around 50.7 billion yuan, the highest since 2014. Analysts attribute the large increase in the inbound investment to the higher interest rate offered by China's bond market compared to elsewhere.
Chinese media has reported that currently, more than 100 financial institutions have been registered in the Tianjin free trade zone. A separate one-belt-one road project database has been set up that include over 80 projects amounting to 180 billion yuan in investments. According to government officials in Tianjin, the free trade zone is speeding up its implementation of 30 financial reforms suggested by the People’s Bank of China (PBOC). Currently 70% of those financial innovations have been implemented so far.
According to the National Institution for Finance & Development, as of the end of 2015, total national Chines debt is 168.48 trillion yuan and the leverage is 249%. And the leverage for non-financial institutions excluding LGFVs (local government financing vehicles) is 131.2%. It is reported that around 25% of onshore listed Chinese companies cannot cover their debt obligations.
The NEEQ (National Equities Exchange and Quotations), the Chinese OTC market, has seen a boom in new IPOs in 2016. In 2015, 5126 companies were listed in the NEEQ that number has grown to 9122. The market cap of the NEEQ reached 3.543 trillion or nearly two thirds of Shenzhen Stock market. However, the PE ratios of those NEEQ listed companies are much lower than companies on the Shenzhen Stock Exchange.
Citing stricter CSRC (China Securities Regulatory Commission) rules, three A-share listed Chinese companies have recently announced to cancel their upcoming M&A transactions. Those companies include Dalian Sunlight Machinery, Shanghai Dingli Technology Development and Sichuan Guodong Construction. On 27th of September, Jiang Yang, vice chairman of CSRC stated in a public speech that the CSRC will carefully monitor future M&A transactions to ensure the quality of Chinese listed companies.
On September 30, CFETS (China Foreign Exchange and Trade System) updated the list of qualified players allowed on China interbank FX market. The Asset collected data and discovered that currently 48 financial institutions have been allowed to participate in the netting business of China’s interbank FX market. Some foreign investors include names such as HSBC, DBS Bank, Citi, and Deutsche Bank. Most of the approved 48 financial institutions are also involved in bilateral clearing.
According to Chinese media, the NDRC (National Development and Reform Commission) has granted a 500 million subsidy to PPP (Public-Private-Partnership) projects in China. The subsidy will be used for 703 PPP projects with a total value amount of 1.2 trillion yuan. The projects cover energy, transportation, hydro-power, environmental protection, medical, education and municipal projects.
Charles Li, the chairman of the HKex states that the HKex is considering the feasibility of a new IPO connect scheme, following the Shanghai-Hong Kong and Shenzhen-Hong Kong Stock programmes. The new IPO connect program will allow Hong Kong investors to subscribe to newly listed Shanghai and Shenzhen stocks as well as allow mainland investors to subscribe into new Hong Kong listed stocks in the primary market. The new IPO connect program is part of the HKex’s three year plan to increase activity on the exchange.
According to Chinese media, Securities & Futures Commission of Hong Kong have approved 21 licenses on asset management in September. Analysts attributed the large increase to the forthcoming Shenzhen-Hong Kong stock connect programme. More Chinese capital aims to invest into the international financial market. The first half of 2016 saw the issuance of 1197 licenses for asset management companies operating in Hong Kong.
Non-financial overseas direct investment (ODI) from Chinese companies have accumulated to 102.8 billion USD for the first seven months of 2016, 61.8% up from the same period last year. High-end manufacturing companies in Europe and the US are most favored by Chinese companies. Analysts believe that the acquisitions are beneficial to both parties. On one hand, Chinese companies can get access to the advanced technology and add more value to its supply chain. On the other hand, the acquisition has also provided target companies with new development opportunities.
Acting has a financial bridge between Hong Kong and Guangdong province, the Guangdong FTZ has attracted 3476 Hong Kong companies with a total investment amount of 313.1 billion yuan as of the end of first half in 2016. Since its establishment in April 2015, the Guangdong FTZ has introduced a number of innovations to the region to lower the entry requirements of Hong Kong companies. On September 14, 2016 the Hong Kong government and Guangdong government signed a cooperation agreement, supporting Hong Kong companies and companies within the FTZ to participate in the one-belt-one-road projects.
In order to better monitor the financial risks of China's banking sector, China’s Banking Regulatory Commission (CBRC) issued guidance on risk management. The guidance requires that each bank should build a risk management framework, which includes a MIS (management information system) and internal audit to oversee risk within the organization. The guidance also requires that the board of directors should employ a CRO (chief risk officer) to lead the risk management division. The guidance will be effective on the 1st of November this year.
China’s National Bureau of Statistics have recently announced that the profit of China's manufacturing industry has risen by 19.5% YOY in August, which is the highest in the past three years. While the receivables increased 8.5% in August, the receivables turnover ratio keeps declining. Analysts are worried that an increasing receivables turnover ratio could lead to a higher default rate. In a bid to deal with the low receivables turnover ratio, some manufacturing companies have chosen to employ a factoring company to improve their cash flow.
Chinese media observed that as of October, several Chinese cities have issued new policies to cool down the property market in China, these include cities such as Wuhan, Hefei, Jinan, Wuxi and Chengdu. While the new policies are different in those cities, the objectives are to restrict citizens from speculating on the properties. Most of the new policies focused on the down payment ratio for those who already own another property.
As of the end of September, 149 companies have been approved to be listed on the Chinese stock market by the China Securities Regulatory Commission (CSRC), raising a total of over 100 billion yuan. Top Chinese underwriters for Chinese IPOs include China Securities, Citic Securities, GF Securities, Essence Securities and China Merchants Securities. Around one third of all the IPOs listed in China this year September 2016 have been executed by those five companies. Year-end 2016, GF Securities, Citic Securities and Guosen Securities are most likely to lead the Chinese underwriting league table. GF Securities currently has 61 IPO applications awaiting approval from CSRC. This is followed by Citic Securities and Guosen Securities, with 52 and 46 applications respectively.
Following the VAT (value-added tax) reform imposed this May, the Chinese Ministry of Finance announced on its website that it would lower the consumption tax rate of cosmetic products from 30% to 15%. Back in June, some Chinese experts noted that China would adjust some consumption tax regulations. Moreover, the tax rate of some products related to oil and gas will be lifted. According to Chinese media, the objective of the tax reform is to encourage more consumption and to make the whole tax system more reasonable.
China’s SAFE (State Administration of Foreign Exchange) has repeatedly denied claims that Deutsche Bank was transferring its Huaxia Bank sale proceeds offshore. Facing problems back in Germany, Deutsche Bank has been in need of additional funding after shares of the Frankfurt-based bank dropped more than 50% year-to-date September. Normally institutions looking to take Chinese proceeds offshore need to get the approval from SAFE which tightly regulates outflows from China. Sources familiar with the matter say that the regulator is willing to let Deutsche Bank proceeds offshore as long as it is conducted in batches rather than in one go.
CSRC (China Securities Regulatory Commission) has recently imposed a window guidance that has abolished the previous QFII (Qualified Foreign Institutional Investor) requirement of a minimum equity asset allocation of 50%. Several Chinese analysts believe the new flexible guidance on asset allocation can increase the chances of Chinese A-shares being included into the MSCI index. The A-share market saw increased interest from QFII in 2016. QFIIs increased their investment in China's A-share by 9.83% from Q1 to Q2 of 2016. As of August 2016, there were 1046 QFII accounts operating on the A-share market. Over 80 accounts QFII accounts were opened in 2016.
Bank of China Shanghai Branch has recently helped its corporate client to trade SCP (Super & Short-term Commercial Paper) under its free trade zone (FTZ) account. It is the first time that China's FTZs saw a RMB bond trade at a banking counter. The Shanghai Clearing House was the custodian of this transaction. Currently, both onshore and offshore qualified investors can invest in RMB bonds through an online platform of the Shanghai FTZ or at the counters of qualified banks.
Following yesterday's news that Chinese listed companies sold properties in an effort to maintain their cash flows, Chinese media further discovered that as of September 23, 73 listed companies have announced they were selling property to reduce corporate losses and avoid being asked to delist from the stock market.
Sinosteel Engineering & Technology (Sinosteel) announced that it has become the first Chinese state-owned enterprise (SOE) to participate in a debt-to-equity swap programme. According to Chinese media, the total debt of Sinosteel around 60 billion yuan while the swap size will be around 30 billion yuan. Chinese banks and state council approved the application of Sinosteel as the steel company has been gradually improving its profitability.
Xi'an Tian He Defense Technology announced that it will sell three properties in Beijing to maintain its cash flow. Prior to Tian He's property sale, Nanjing Putian Telecommunications also sold two of their properties to enhance its profitability. In the first half of 2016, many major shareholders of Chinese listed companies sold their A-shares, which suppressed the growth of the A-share market. Chinese media suggests the recent sales from listed companies may be a signal to investors that Chinese property prices will fall in the coming months.
Recently several Chinese securities companies announced their IPO plans in Hong Kong. According to Chinese media, those securities companies include China Securities, China Merchants Securities, Guotai Junan Securities, Ping An Securities, Industrial Securities and Changjiang Securities. If all 6 companies are successfully listed on the Hong Kong Stock Exchange, then there will be a total of 17 Chinese securities companies listed on the exchange. Chinese analysts attribute the strong interest from Chinese securities companies in Hong Kong market to slow IPO application process on the A-share market.
At an event in Beijing last Friday, AMAC (Asset Management Association of China) confirmed that as long as foreign private equity companies register with the AMAC, they can open an A-share account in the CSDC (China Securities Depository and Clearing Corporation) and therefore invest in the Chinese stock market. Currently only JP Morgan Asset Management (Shanghai) set up in Shanghai free trade zone is the first foreign asset management company able to invest in the Chinese secondary market.
China Chengtong Holdings Group (Chengtong) announced that it was appointed by SASAC (State-owned Asset Supervision Administration Commission) like many other Chinese state-owned enterprises (SOEs) to contribute to China’s SOE restructuring fund (中国国有企业结构调整基金) focused on state-owned enterprise restructuring. The current size of the SOE focused fund is 350 billion yuan.
Managers of the fund include Chengtong Group, PSBC (Postal Saving Bank of China), China Merchants Group, China North Industry Group, Sinopec, China mobile, etc.
According to Chengtong, the SOE fund will invest in Chinese strategic sectors such as military defense and natural resources. Last month, a state-owned asset venture capital fund (国有资本风险投资基金) was set up by a group of SOEs to focus on technology development . The current size of that fund is 200 billion yuan.
Dongbei Special Steel Group recently announced on its website that it has defaulted on one of its debt obligations. The latest default was on a one year debt with an amount of 700 million yuan and a coupon rate of 6.3%. It is the ninth time that the group has defaulted on its debt. Total unpaid principal from the company is now at 5.8 billion yuan.
According to PBOC (People's Bank of China), the National Bank of Canada will issue a panda bond no more than 5 billion yuan (US$750 million) in China’s interbank bond market. The issuance of this panda bond signals closer financial cooperation between the two countries. Earlier this year the province of British Columbia issued its US$456 million debut panda bond.
CSRC (China Securities Regulatory Commission) issued an official guidance on fund of funds to protect the retail investors. The new guidance requires that 80% of the proceeds have to invest in other public funds and the fund manager has to report the unit value of the assets to the investors regularly. CSRC is looking to issue guidance on the fund of funds from different industries going forward.
According to the Chinese MOC (Ministry of Commerce) in 2015, China shortened the negative list in FTZs from 190 regulations to 122 and it is likely that the list will be further shortened going forward. The negative list including forbidden activities by foreign investors will be applicable nationwide starting from the beginning of October. Moreover, the first half of 2016 saw 99% of the foreign invested enterprises in the four FTZs (Shanghai, Guangdong, Tianjin and Fujian) set up through an enterprise filing procedure, which shortens the time of application from 20 days to 3 days.
Ministry of Finance (MOF) announced that it was encouraging Chinese companies to enter into a stock ownership program. The MOF says that employees of companies that participate in the program do not have to pay tax for their stocks or options obtained from the employees' stock ownership program. However, when stocks are transferred employees should pay a 20% tax rate compared to 30% rate when transferring outside of the program.
Chinese investors are showing interest in purchasing properties in UK, following Brexit. Since September 2016, Chinese investors have already bought three office buildings in central of London. The investors include SRE Group, Vanke, Country Garden and Gree.
According to SAFE (State Administration of Foreign Exchange), the application of overseas listed Chinese companies to return to the A-share market can negatively affect the image of these companies. It is expected that many of those companies are looking to gain arbitrage due to the higher PE ratio in the Chinese stock market. SAFE says that China will prevent those companies from doing so and support capable companies in overseas M&A.
Chinese media observed that the A-share market has been less volatile for the past few months. Since September 2016, the Chinese stock market for the most part saw less than a 1% fluctuation in change. The Chinese stock market this year has seen 18 consecutive days where the fluctuation was less than 1%.
Market data shows that for the first eight months of 2016, income from land sales was over 2 trillion yuan. It was 14% more than the same period last year. Over 50% of the fiscal income originated from land sales in Suzhou, Hangzhou, Hefei and Nanjing. Most analysts agree that the land sales have boosted the average housing price potentially taking capital away from other areas of the economy.
CFETS (China Foreign Exchange Trade System) has announced recently that the Central Bank of Jordan, State Bank of Pakistan, the Arab Monetary Fund (AMF) and Central Bank of Iraq have been qualified to participate in China's interbank FX market. State Bank of Pakistan and the Arab Monetary Fund (AMF) are allowed to participate in the spot, forward and swap markets while Central Bank of Jordan can only tap the spot and forward market. The Central Bank of Iraq can only enter the spot market.
Chinese media has reported that since 2015, 18 new securities companies have applied for licenses in China. Among the 18 companies, Shengang Securities, the first securities company with a Sino-foreign joint venture (JV) structure and Huajing Securities have been approved. In addition, six of them will be set up in the free trade zones of Guangdong or Shanghai. Foreign investors such as HSBC, BEA and UOKH have participated in setting up securities companies with a Sino-foreign joint venture structure.
SASAC (State-owned Asset Supervision and Administration Commission) has approved the merger of Baosteel Group Corporation and WISCO (Wuhan Iron and Steel Group Corp). It is expected that together both companies will form a steel group with assets of over 700 billion yuan handling an annual steel supply of over 60 million tons. It will be the second largest steel group in the world. COSCO and PetroChina are the two other major shareholders in these SOEs.
In face of growing concerns over the notes issued by banks since 2016, the CBRC (China Banking Regulatory Commission) has been strengthening its oversight on banks' notes issuance. Recently 44 financial institutions were fined 150.6 billion yuan in the third quarter of 2016. These include big banks such as ABC (Agricultural Bank of China), BOCOM (Bank of Communication), CCB (China Construction Bank) and ICBC (Industrial and Commercial Bank of China). Chinese analysts believe that the risk from the banks' violation in notes issuance is the result of banks' insufficient due diligence process in monitoring their clients.
Shang Fulin, chairman of the CBRC (China Banking Regulatory Commission) said in a speech that the group will encourage more AMCs (asset management companies) to participate in debt-to-equity swap deals in order to bolster lagging Chinese steel and coal companies. According to Chinese media, the guidance on debt-to-equity swaps will be issued by the NDRC (National Development and Reform Commission) in late September 2016. State-owned commercial banks will take the lead in this debt-to-equity swap trial.
Chinese state land sales have been on the rise providing additional income to the government which has been grappling with the decrease of fiscal income. Data from the Chinese MOF (Ministry of Finance) shows that at the end of August 2016, the income from land sales has amounted to over 2 trillion yuan, up 14% from the same period in 2015. Tier one and tier two cities benefit the most from the land sales due to the prospects of a higher property price.
Undisclosed securities companies tell Chinese media that they have stopped servicing property developers from tier three and tier four cities with bond issuances. An earlier regulation in July from the CSRC (China Securities Regulatory Commission) restricts the funds raised by property companies to be used for paying back debt and purchasing land. According to Wind data, corporate bond issuance in August was 186 billion yuan, 48% up from last August. Property leads all other sectors, accounting for 32% of the total bond issuance in August.
Data from (CCDC) China Central Depository & Clearing and Shanghai Clearing House shows that the issuance of RMBS (residential mortgage-backed securities) has grown by 4 times to 72.8 billion yuan since the start of the year. According to Chinese media, the first half of 2016 saw 42% increase of new loans from 10 listed Chinese banks including ABC, CCB and CMB. The RMBS is considered a less risky investment in China due having a physical collateral such as property. Currently more banks are looking to tap the RMBS market.
NDRC (National Development and Reform Commission) disclosed that in August 2016 it had approved 25 infrastructure projects totaling 196.6 billion yuan. These include 6 water conservancy projects, 14 in transportation projects, 2 new energy projects and 3 municipal projects. From September 2014 to July 2016 there has been around 6.37 trillion yuan investment put into Chinese infrastructure projects.
PBOC's (People’s Bank of China) vice governor Yi Gang pointed out in a meeting organized by the Austrian central bank that China will be cautious in adjusting the interest rate given a large GDP growth in China. In regards to negative interest rates, Yi says that it has some limitation but it could be an effective policy both in practice and in theory. Data from the National Bureau of Statistics shows that China's economy growth has improved in August 2016. For example, Chinese companies with an annual revenue of 20 million yuan or higher grew at 6.3% in August 2016 compared to the same period last year.
Data from the MOF (Ministry of Finance) shows that the growth of fiscal income in August 2016 was 1.7%, down from 3.3% from July 2016. On the other hand growth in government expenditure grew from 0.3% to 10.3% between July-August this year. Since China expanded its VAT (value-added tax) reform nationwide in May 2016, combined VAT income has been steadily decreasing. Among all industries included in the VAT reform, real estate, finance and construction industries have suffered the most, experiencing a 20% decrease since the VAT reform was implemented.
Chinese media has discovered that a number of Chinese new energy vehicles companies such as BYD, Geely and SAIC Motor have been involved in fraud issues. Companies above have been accused of exaggerating their production numbers of new energy vehicles so that they could apply for more government subsidies. In China, each new energy bus can get at least 300 thousand yuan subsidy from the government. Chinese analysts have urged regulators to issue updated rules regarding subsidies of new energy vehicles.
In the 19th CIFIT (China International Fair for Investment & Trade) held in Xiamen, a special panel on “One Belt One Road” announced that 41 FTZ (free trade zone) contracts were signed amounting to 71.7 billion yuan in investment. Of the 41 contacts, 24 involved foreign investors, totaling 9.5 billion yuan in investment. The fair attracted investors from the US, UK, Australia, Indonesia, Kazakhstan, Hong Kong and Taiwan. Investment proceeds will go to projects focused on aviation, financial services, education, medical services, factoring and cross-border e-commerce.
In face of an increasing AUM (assets under management), the wealth management arms of major Chinese banks are outsourcing their business to third-party financial institutions such as asset management companies, trust and structured asset management plans. Due to lack of investment opportunities, wealth management products offered by banks have been gaining popularity with retail investors. At of the end of 2015, the total balance of wealth management products was around 23.5 trillion yuan. According to Shenwan Hongyuan Securities, over 20 trillion yuan asset was outsourced in 2015. Urban commercial banks played a significant factor in wealth management outsourcing contributing around 50% of total outsourced assets in the first two months of 2016.
CFETS (China Foreign Exchange Trade System) announced on its website that Huawei, a leading Chinese technology company, has been approved to enter the China's interbank FX market. The move makes Huawei the first non-financial institutions to participate in this market which takes effect on September 14th, 2016. Currently only the spot FX market is open to Huawei.
CSRC (China Securities regulatory Commission) has released an official regulation that will set up a special IPO application path for the corporates from the underdeveloped regions of China. Those companies from underdeveloped areas will no longer need to queue together with other companies in an IPO, bond issuance and M&A application. As of the end of August 2016, 743 companies were still waiting for the approval of their IPO application from CSRC.
CIRC (China Insurance Regulatory Commission) issued an official regulation, allowing Chinese insurance companies access to the Shanghai/Hong Kong Stock Connect. Under the new regulation, managers of wealth products issued by insurance companies can invest through the stock connect. The rules provide another tool for insurance companies to diversify their asset allocation and risk.
CCDC (China Central Depository & Clearing) issued an official regulation regarding cross-border RMB bond issuance in Shanghai Free Trade Zone. Both onshore and offshore corporates are allowed to issue RMB bonds in the FTZ after completing the registration with CCDC. All qualified onshore and offshore investors are able to directly invest in the SFTZ bond market. Investors can trade bonds through an online platform or directly with a dealer.
Data from China Customs shows that in August 2016, import has grown by 1.5%, the first time that import increased since November 2014. Some Chinese analysts believe that the recovering price of commodities and aggregate demand explain the increase. Others say that the increase in import is caused by capital outflows. During the same period, exports saw a slight drop but the rate of decrease is slowing down.
The People’s Bank of China (PBOC) announced on September 9, 2016 that the forex reserve in August declined to US$3.185 trillion down US$15.9 billion compared to the amount recorded in July. It was the second consecutive month in which Chinese FX reserves had declined. Though China’s FX reserve has dropped US$330 billion since last September the speed of decrease is slowing down this year. Chinese analysts believe that the safety line for the FX reserve is within US$1.5 trillion to US$2 trillion, as China's current foreign debt is just around US$1.6 trillion.
CSRC (China Securities Regulatory Commission) has recently released its regular report on Chinese securities companies. In the latest report, the CSRC disclosed that three companies including Sinolink Securities, China Galaxy Securities and Soochow Securities have misused information, applied unreliable methodology and misquoted in their research reports. CSRC has sent warning letters to these companies in an aim to urge those companies to impose tighter oversights on their quality of research reports in event of misleading the investors.
Data from Securities of China shows that the first half 2016 saw GTJA securities, Citic securities and Guangfa securities were the top 3 securities companies with highest net profits 1.159 billion yuan, 1.015 billion yuan and 883 million yuan respectively in the asset management business.
For the past three months, Chinese blue chip technology companies have seen an average share price increase by 25%, while the NASDAQ index has only risen by 6% in the same period. Analysts report that the surging prices of these technology companies is attributed to the outperformance of company profits. Earlier this week Chinese-based Tencent became the largest company in Asia in terms of market capitalization with US$255.8 billion.
The CSRC (China Securities Regulatory Commission) is speeding up its reviewing process of IPO applications, leading to rise in Chinese IPOs. Data from CVSource shows that in August 2016, 33 Chinese companies were listed, 8.25 times the number recorded last August. Total fund raised in August 2016 was 35.3 billion yuan, 3.86 times higher compared to the same period last year. According to iFinD, the underwriting and sponsor fees of securities companies has amounted to 730 million yuan, up 38% from the same period in 2015.
According to Chinese media, out of the 38 fund companies have released their semi-annual reports only two of them have incurred a net loss. However, 24 out of 38 companies have seen a profit decrease in the first half of 2016. Among all fund companies, Efund, ChinaAMC and Tianhong AMC were the top 3 in terms of assets under management (AUM) size with 769 million yuan, 700 million yuan and 585 million yuan respectively, as of the end of first half of 2016.
Data from Wind Information, a Chinese data company shows that the first half of 2016 saw 173 Chinese listed property developers report a total debt of 4.3 trillion yuan, up 24% from the same period last year. In the first 7 months of 2016, corporate bonds issued by Chinese property developers was around 576 billion yuan, which is larger than the total amount raised in 2015.
China Securities Finance, which holds shares in 80 listed companies, has increased their stakes in listed banks. As of the end of first half, China Securities Finance is ranked as one of the top 10 shareholders in 15 out of 19 listed banks. China Securities Finance for example increased 1.147 billion shares in ABC (Agricultural Bank of China), now possessing a 1.92% stake. Moreover, China Securities Finance also increased its stake in listed private banks such as Minsheng Bank, purchasing an additional 624 million shares resulting in a current stake of 4.37%.
Data from Steel Index shows that spot price of coking coal has risen by 70% since this June. Moreover, the price of coal futures traded in Dalian Commodity Exchange also increased by 60% since the beginning of this year. It is believed that Chinese supply side reform is the reason for the rise in prices. As the NDRC (National Development and Reform Commission) speeds up the supply cut, the price of the coal is likely to remain at a high level for the next few months.
According to Zhou Xiaochuan (周小川), governor of PBOC (People’s Bank of China), the next stage of China's bond market development is to set up a robust regulatory framework. According to Chinese media, NAFMII (National Association of Financial Market Institutional Investors) is about to issue a regulation on investor protection. The CSRC (China Securities Regulatory Commission) will be the organization responsible for enforcing the law. Currently, NAFMII has already completed the drafted regulations on corporate bonds issuance in infrastructure projects and property development projects, with respect to information disclosure.
In light of an aging population, China is looking to improve its current pension fund system. However, the lack of income and over expenditure has led to pension fund account deficits. In eight provinces including Heilongjiang, Jilin and Qinghai, the pension fund pool is only ten times of their monthly expenditure. It is expected that China will adopt a triple layer pension fund system in the future, in which government, corporates and individuals contribute to the pension fund pool.
As a result of its increasing share price, Tencent has overtaken China Mobile as the largest company in Asia in terms of market cap. As of September 5, 2016 Tencent has seen a market cap of 255.8 billion USD, followed by China Mobile, Alibaba and Samsung. This August, Tencent reported a historical net profit increase of 47%, due to the dramatic rise in revenue from its popular Wechat app.
According to Chinese media, SASAC (State-owned Asset Supervision and Administration Commission) has set a timeline for SOE reform. By the end of 2017, SASAC requires all SOEs to introduce private ownership, whether by restructuring, IPO or M&A. Shanghai, Guangdong, Jiangxi and Shandong are likely to be the first batch to issue a regional draft proposal in the SOE reform. Currently, some of the biggest challenges to China’s SOE reform is the willingness of SOEs to transform. Moreover, private investors are cautious of taking stakes in SOEs.
People's congress of Xiamen issued an official guidance on its free-trade zone (FTZ) to boost the internationalization of the RMB. The guidance now allows several RMB-related activities including cross border RMB cash pool, setting up cross border investment funds, offshore RMB loans, cross-border trade of leasing assets denominated in RMB etc. Individuals in the zone can also make settlement in RMB in their current accounts and investment accounts. As a bridge between China and Taiwan, Xiamen FTZ also provides cross border reinsurance services to Taiwanese companies.
According to Chinese media, the first half of 2016 saw 10 out of 16 A-share listed banks report decreasing the number of employees. Factors such as salary cuts, popularity of online banking and an increasing number of retiring bank employees are believed to be behind the reduction.
Following the growth of overseas investors into the Free Trade Zones (FTZ), China is now considering applying the FTZ "negative list", also known as a list of sectors forbidden to foreign investors to China's nationwide law on foreign investors. Currently, Shanghai, Guangdong, Fujian and Tianjin FTZs are implementing the “negative lists”. The data from China’s MOC (Ministry of Commerce) shows that as of June 2016, 4923 foreign companies have been newly established in the four free trade zones, bringing in a total of 359.2 billion yuan investment.
According to Chinese media, China’s MOC (Ministry of Commerce) has revealed that by the end of 2016, seven more Free Trade Zones (FTZs) will be set up within in the country. Locations include Liaoning, Zhejiang, Henan, Hubei, Chongqing, Sichuan and Shanxi. The Free Trade Zones will implement different strategies based on their own regional industrial features. Henan FTZ for example will focus on infrastructure investments whilst Hebei’s FTZ is planned to concentrate on technology and emerging industries.
As of the end of August 31, 2016 2911 companies listed on the Shanghai and Shenzhen stock exchanges have released their semi-annual results. The Shanghai market saw a 2% year-on-year increase of income originating from “new economy” companies now equal to 42.4% of total income from Shanghai listed companies. In the Shenzhen stock exchange, 516 companies labeled as “new economy” reported a total income of 38 billion yuan, up 49.48% from the same period last year.
As of August 30th 2016, all five state-owned banks ABC (Agricultural Bank of China), BOC (Bank of China), BOCOM (Bank of Communications), CCB (China Construction Bank) and ICBC (Industrial and Commercial Bank of China) have released their semi-annual reports. Under the IFRS (International Financial Reporting Standards), the total amount of net profits of China’s five top banks combined is 520.4 billion yuan, resulting in a combined daily net profit of 1.42 billion yuan. The growth rate of net profits of ABC, BOC, BOCOM, CCB and ICBC are 0.8%,2.25%,0.9%,1.25%, and 0.8% respectively, slower than the same period last year. Noticeably, the NPL ratio of ABC, BOC, CCB and ICBC have increased. BOC attributes the slower growth to the PBOC's (People’s Bank of China) interest rate cut, liberalization of interest rate and VAT (value added tax) reform.
Recently the Chinese insurance industry is becoming more attractive as many private investors see insurance companies as a tool of fundraising with a low cost. In a bid to address the higher risks, China’s Insurance Regulatory Commission (CIRC) is considering modifying the current rules to restrict the entry level of being a shareholder in an insurance company. The shareholders should have a good track record of profitability and should reach the minimum level of net assets. For investors looking for a controlling stake the minimum level of net assets is 10 billion yuan while a non-controlling stake is 200 million yuan. Those who have violated regulations while invested in prior insurance companies will not be qualified to be shareholders of any additional insurance companies.
China's President Xi Jinping stated in a speech today that green finance will be an important tool in supply side reform. Xi also highlighted that China was looking to attract more investment into green projects and introduce more financial products such as green credit, green bonds, green equity index, green development funds, green insurance and carbon finance to support green projects. According to Xi, more regulations and law towards green finance will come out to better facilitate and supervise the green industry.
Chinese media observed that for the past two months, the National Development and Reform Commission (NDRC) has approved 12 infrastructure projects in transportation amounting to a total of 284.9 billion yuan. According to the Ministry of Transportation the second half of 2016 will feature additional transportation projects. The main source of funding will be from banks, the government and PPP (public-private-partnership) programmes.
In a bid to deal with increasing labor costs, the National Development and Reform Commission (NDRC) is considering cutting down the contribution rate of the compulsory "Five insurances and one fund" which handles endowment insurance, unemployment insurance, employment injury insurance, maternity insurance and housing provident fund for Chinese companies. On August 22th 2016, the State Council issued a guidance stating that within one or two years, the contribution rate of the "five insurance and one fund" should be lowered. Currently, the labor cost is China is 1.5 times of Thailand, 2.5 times of Philippine and 3.5 times of the Indonesia.
Due to shrinking trading volume in the A-share market for the first half of 2016, listed securities companies have seen a large revenue drop leading to a number of salary cuts. As of August 29th 2016, 22 Chinese listed companies that have publically stated their interim results. Out of those 22 companies, only West Securities has increased the salary of its staff. Eight out of the 22 companies reported a salary cut of over 50%. China Merchants Securities for example cut its staff salary by 75%. Even China International Capital Corp. (CICC), one of the most profitable companies in the Chinese financial services industry decreased their salary expense by 40%.
NDRC is looking to issue an official guidance on debt-to-equity swaps as early as next month. Under the guidance, state-owned commercial banks will be the major participants swapping debt for equity while steel and coal companies with potential for profitable enterprise will be the major beneficiaries. Chinese analysts believed that unprofitable companies in the coal or steel industries will be liquidated without recourse to the debt-for-equity swap programme.
CIRC has issued a drafted regulation on equity investments, barring insurance companies from buying stocks of listed companies together with other non-insurance investors with the objective of acquiring the target company. Beyond a certain level of ownership, insurance companies will have to use funds other than those coming from premium income to increase their stakes. They will also have to report their transactions and intentions to the CIRC. The new regulation follows the recent hostile takeover attempt of China Vanke by Baoneng Group.
The top three crude oil and gas producers, CNPC (PetroChina Company Limited), Sinopec Corp and CNOOC (China National Offshore Oil Corporation) have seen substantial profit drops in the first half of the year, due to the depressed oil price. CNPC reported a 98% decrease in net profits while Sinopec also saw a 21.3% profit decline. CNOOC incurred a net loss of 7.7 billion yuan, which is the first time that CNOOC reports a net loss since 2011. All three still declared and distributed dividends to investors as usual. Analysts point out that the oil price is likely to remain at depressed levels once Nigeria, Iraq and Libya increase their crude oil production and thus exacerbate the oversupply.
PBOC announced that Poland has successfully placed a three year renminbi denominated sovereign bond in China's interbank bond market, raising 3 billion yuan. According to the PBOC, the issuance of the RMB panda bond came as a result of a meeting between President Xi and Polish officials in June. The deepened cooperation between the two countries also boosts the liberalization of the CIBM. Bank of China, acting as lead underwriter and bookrunner, said in a separate statement that the funds from the bond will be used for projects relating to the One Belt, One Road intiative.
According to Chinese media, China is considering to issue new regulations concerning the tax benefits and fiscal expenditures of public-private partnership (PPP) projects, due to a booming demand for such projects. Analysts believe that investment opportunities worth trillions of yuan could be exploited with PPP projects, but that the regulatory framework is lagging the development of the market. As of the end of July, there are 10,170 PPP projects registered with the China Public Private Partnership Center (CPPPC), amounting to 12 trillion yuan.
Chinese media recently received official documents saying that once again Chinese institutional investors will buy overseas football clubs in England, Spain and Italy through Structured Asset Management Plans (SAMPs). Chinese high net worth individuals and institutional investors will provide the funds into the SAMPs. The SAMPs will only invest in the acquisition of European football clubs that demonstrate robust profitability. Chinese investors have been proactive in acquiring overseas football clubs such as Inter Milan.
China's State Council has issued a guidance on the allocation of responsibilities between local and central government authorities in public projects. Under the guidance, the central government will decide whether or not it participates in public projects, either in collaboration with local governments or wholly by itself. In 2016, defense and national safety will be the main focus areas, the guidance further says, while in 2017 to 2018, the reform will be extended to education and medical industries. It is hoped that clearer guidance will enhance asset allocation and avoid repetitive funding in public projects. In practice, the new regulation is difficult to implement, according to the Ministry of Finance, but the efficiency gains will be worth the effort.
CBRC, MIIT (Ministry of Industry and Information Technology), MPS (Ministry of Public Security) and CAC (Cyberspace Administration of China) jointly issued a regulation on P2P activities. Under the new rules, online third-party P2P platforms cannot collect deposits or set up asset pools. Any form of securitizations of the loans is not allowed, either. The regulation also sets an upper limit on loans to individuals on a single platform to be 200,000 yuan while the total amount an individual can borrow through all platforms is capped at 1 million yuan. Chinese analysts believe that the regulation will slow the pace of growth but that the P2P market will be more mature as a result.
Guangdong's Nansha FTZ announced three developments regarding the RMB liberalization. The first reform allows financial institutions to open current accounts for cross border RMB settlement for individuals. CCB Guangdong FTZ branch and CCB Asia have already rolled out a new debit card supporting this bilateral account, which also allows offshore RMB to be invested in onshore wealth management products. The second development concerns individuals and their ability to borrow RMB from Hong Kong and Macau to invest in tangible assets such as property in FTZ. Again, CCB is first to offer this service. The third reform is that individuals in Nansha are allowed to directly invest in overseas companies through an equity investment.
SASAC (State-owned Asset Supervision and Administration Commission) is targeting oversupply cuts of certain commodities by 10% within two years and also said it will manage a restructuring of 345 large and medium-sized "zombie companies". In addition, SASAC has implemented a window guidance to SOEs that requires them to set up an exit mechanism, applicable to those SOEs failing to fulfill profitability, safety, quality and environmental protection requirements. The exit plan should include measures for the business to either close down, be spun off or restructured. As of the end of July, data from National Development and Reform Commision shows that although China has only completed 38% of the target amount of supply cuts in the coal industry for the whole year. However, in July, it accomplished 9% of that total, indicating that the supply side reform is speeding up in the second half of 2016.
On August 23, CFETS announced it approved 7 applications to participate in China's interbank FX market, 4 of which are overseas investors, including MIGA (Multilateral Investment Guarantee Agency, an arm of the World Bank), NBS (National Bank of Slovakia), the African Development Fund, the African Development Bank. Taiwan Business Bank's Wuhan Branch is also included. As of August 23, a total of 23 offshore sovereign and quasi-sovereign institutional investors have entered the interbank FX market. Among them, 11 come from Asia, 6 from North America, 3 from Europe, 2 from Africa and 1 from Australia.
In light of CSRC's tighter regulation towards asset management companies, robot advisory business has grown only slowly in China. CSRC is now overseeing the robot advisory market closely to prevent unregistered P2P institutions from illegally selling asset management products through their robot advisory platform. According to Chinese media, there are only around 80 institutions which have obtained the securities advisory licenses from CSRC and none of them are exclusively robot advisory platforms. Chinese analysts also cite the lack of liquidity investment products and lack of investor education as reasons for the slow development of robot advisory in China.
In light of growing difficulties in picking the right A-shares, retail investors in China are turning to more passive investment strategies by investing more into ETFs. According to CSRC, as of the end of July, 22 new ETFs have been registered by fund companies this year. Among them, the CSI Shanghai-based SOE ETF was the most popular one with an IPO issuance of 15.22 billion shares. In June and July, the Guotai CSI Securities ETF and Guotai CSI Defense ETF were listed as the first ETFs focusing on the two respective industries.
During the latest G20 meeting, the PBOC identified several challenges afflicting the 'green' bond segment: a maturity mismatch between loan/bond tenors and project lengths, unclear definition of 'green' activities, asymmetric information and lack of proper analysis of environmental risks. To address these problems, the PBOC has proposed a series of initiatives to develop green bonds, including larger asset allocation by institutional investors in line with the SBN (Sustainable Bank Network) and PRI (Principles for Responsible Investment) frameworks as well as improving the analytical skills in environmental risks. China has become the largest green bond market in the world by issuing a total amount of 120 billion yuan green bonds since the beginning of 2016, making up 45% of the global green bond market.
The disparity of pension fund balances among different provinces in China is widening. According to the Ministry of Human Resources and Social Security, 6 provinces have reported a deficit in their pension fund account, including all of the three provinces in northeast China (Heilongjiang, Jilin, and Liaoning). The deficits are attributed to the aging society and increasing dependency ratios. According to Chinese media, a draft of a general pension fund regulation to deal with this imbalance has been completed and will be released by the end of this year. Under the new rules, besides the independent account set up by each province, an integrated account will be set up to collect pension contributions from each province and better allocate the distribution of the fund.
Mutual funds in China with exposure to Hong Kong stocks have seen record levels of inflows, but the existing QDII quota cannot support this recent pace of growth much longer. As of August 15, the AUM of E Funds' Hang Seng Chinese Corporates ETF Fund exceeded 10 billion yuan, making it the largest QDII fund in the history of the program. All 12 QDII funds in China with exposure to H-Shares have seen inflows in the second quarter 2016. Because the overall ceiling of the QDII program is close to being fully utilised, analysts expect the Stock Connect programs between Hong Kong, Shanghai and Shenzhen stock exchanges to become important alternatives.
Chinese media observes that 8 out of 9 Hong Kong listed small and medium-sized banks have made applications to have their shares listed in the A-share market as well, chasing higher valuations in the domestic market. Tianjin Bank is the only one in the group that has not applied yet. Valuations in Hong Kong of these banks have fallen below 1x price-to-book, driven by concerns over shadow banking issues. In the A-share market, though, valuations below a 1x P/B multiple are rarely seen.
Mobile phone games are considered a cash cow industry in China, but the marke is increasingly dominated by two firms. Mobile phone games accounted for 47.6% of the overall gaming market as of the end of 1H16 with Tencent and Netease.com contributing 70% to the mobile games revenue. The gap between these two leaders and other participants is growing larger. Among other major participants in the gaming industry, three reported revenue declines compared to the same period last year. Meanwhile, more gaming companies use their accumulated cash for overseas acquisitions, with recent deals including Tencent's US$8.6 billion acquisition of Supercell and Giant Interactive's US$4.4 billion bid for Playtika (as part of a consortium).
According to Chinese media, SASAC (State-owned Asset Supervision and Administration Commision) has distributed the final guidance on employees' stock ownership programs among SOEs. SASAC will pick 10 central SOEs and 5-10 local SOEs in total on a pilot basis, but will implement the trial program one after another, meaning that only when the program runs well in one SOE, it will extend to the next SOE. The entire trial is expected to be completed by late 2018, at which time SASAC will consider expanding the program to more SOEs. Under the new guidance, SOEs that contribute more towards technology innovation will be targeted first, while key employees in R&D departments or with management functions will be prioritized to participate in the program. Eligible employees will be allowed to hold no more than 1% of the total outstanding shares, with all shares held by employess exceeding no more than 30% of the total. Notably, employees with management functions appointed by the government are not allowed to participate in the program.
The two major state-owned investment companies, Central Huijin Investment Ltd which holds shares in 240 listed companies and China Securities Finance Co., Ltd, which holds shares in 80 listed companies, have increased their stakes in financial companies including CMB, SPDB, Ping'An Bank, Huaxia Bank, Changjiang Securities and Sealand Securities. They have also increased their stakes in property companies including Gree Real Estate and Shanghai Lujiazui Finance & Trade Zone Development. The preference in those two industries signals growing confidence in banking and property sectors, Chinese media says. Other investors are likely to follow the lead of the two state-owned investment companies. Dubbed "national team" by Chinese investors during the A-share crisis last August, Central Huijin and China Securities bailed out the distressed stock market last year by buying large amounts of stock. As of August 18, 928 listed companies in China's A-share market have released their semi-annual reports.
The Chinese FMCG (Fast Moving Consumer Goods) market is becoming more difficult for international players. Nestle, the world largest food producer, saw its profits in China decline in 1H16, due to slower demand growth. P&G, Coca Cola, Colgate and other international FMCG companies also saw profit decreases in China. Chinese analysts attribute the profit declines to the development of e-commerce, which gives consumers a wider choice of brands that includes domestic ones, and the overall slower growth in consumption expenditures by customers. According to the National Bureau of Statistics, retail sales of consumer staple goods increased 10.2% in July YOY, slightly lower than the 10.6% growth in June.
According to a filing with the Shanghai Stock Exchange, the State Development & Investment Corp. has transferred 30.31% of its shares in Sdic Xinji Energy Co., Ltd, a coal company, to China National Coal Group Corp., a state owned coal company. The filing does not specify whether it received anything in return for the stake. It is the first time that an SOE has rid itself of its coal assets, signalling a potential oligopolistic industry dominated by two state-owned companies: Shenhua Group and National Coal Group. The latest share transfer reflects SASAC's (State-owned Asset Supervision and Administration Commision) approach with respect to the SOE reform, aiming to better integrate and allocate state-owned assets to improve industry efficiency.
An official document from the Shanghai government discloses that the city government is to issue bonds worth 3 to 5 billion yuan in the SFTZ. Corporates and institutions in the area as well as foreign investors will be able to subscribe. The issuance of the government bonds in the SFTZ is regarded as another channel to increase RMB inflows into China. More access channels and financial instruments that put renminbi to use should increase foreign investor appetite for the currency.
Chinese media observed that for the past month, PBOC has imposed penalties on at least seven third party payment companies, fining a total amount of more than 100 million yuan due to violations of the regulations concerning reserve amounts and payment defaults. Third party payment companies in China are becoming more prominent in China. Evergrande is one of the large companies entering this market. PBOC just recently approved the renewal of the licenses at all 27 third party payment companies, but has banned some of them from providing certain services as part of the penalties.
Baoshan Iron & Steel Co., Ltd announced on August 15 that it has swapped 800 million of its shares to PetroChina Company Limited for 624 million shares in PetroChina. The no-cash transaction marks a new direction in SOE reform, introducing cross-shareholdings between unrelated industries. Chinese scholars expect the two SOEs to collaborate strategically, looking for synergies between the steel and energy industries. The phenomenom is already common, with some success stories. For the first half of 2016, among 49 SOEs involved in the cross-shareholdigns, 29 of them reported a profit increase.
According to Chinese media, SASAC (State-owned Asset Supervision and Administration Commision of State Council) has approved a state-owned venture capital fund, which will mainly invest in innovative start-ups or projects. The fund was set up in Shenzhen's Qianhai special economic zone on August 8, with an initial size of 100 billion yuan. The fund was originated by China Reform Holdings Corporation Ltd. Other investors included PSBC (Postal Savings Bank of China) and CCB (China Construction Bank).
According to Chinese media, the innovation department of the CSRC has been merged into the internal audit department. The department had been established in 2014 to introduce innovative finanicial products and supervise them. Its dissolution indicates the CSRC is now more concerned with transitioning to a framework of closer oversight of the market rather than innovation, due to rising systemic risks.
According to Chinese media, Sinosteel Corporation, which has a debt burden of more than 100 billion yuan, is expected to be the first SOE to adopt a debt to equity swap. The swap will take place once a guidance on debt to equity swaps is finalized. According to that guidance, the government will not be the one to bail out creditors in such transactions, even if the swap is disadvantageous to them. In early August, CBRC issued a draft guidance to local offices of the CBRC as well as banks, stating that it will support the debt to equity swap scheme for steel and coal companies.
To encourage more small and medium sized insurance companies to tap the Chinese OTC market, CIRC issued a guidance on insurance companies' IPOs in the National Equities Exchange and Quotations market, as more of them are looking to be listed in this market. Under the guidance, those insurance companies wishing to tap the OTC market should not violate any regulations for the past three years. The guidance also requires that investors acquiring significant portions of the issued stock will have to report to CIRC.
According to AMAC (Asset Management Association of China), as of the end of July, total assets under management mutual funds reached 8.28 trillion yuan, slightly less than the historical high of 8.4 trillion yuan at the end of 2015. Investors sought less risky investment in July. The market size of money market funds was 4.5 trillion yuan, accounting for 54.35% of the total mutual fund AUM while mixed-asset funds saw a significant decline of 5.98% in their AUM from June. Data from AMAC also shows strong interest in fixed income mutual funds. Funds invested in bonds increased 13.42% from last month in size, making them the most popular type of mutual fund in July by inflows.
China is looking to devise a guidance on receivables finance in order to address high debt ratios and funding difficulties for SMEs. According to Chinese media, under the new guidance, commercial banks will be allowed to increase their lending size with receivables as a collateral. In addtion, the receivables will be tradeable on an open platform. While banks and factoring companies are most commonly used in receivables finance transaction, recently more and more companies are tapping the ABS market to securitize their receivables.
China Securities Depository and Clearing Corporation Limited (CSDC) told Chinese media that in July, 4 new A-share accounts were opened by QFIIs, with 2 in Shanghai and 2 in Shenzhen respectively. This is the 55th consecutive month that has seen new A-share accounts opened by QFIIs. As of the end of July, the total number of A-share accounts opened by QFII amounted to 1041. Huaxia Bank is the stock with the highest concentration of QFII ownership, as 8.21% of its public float are held by Deutsche Bank.
Since Ministry of Finance initiated the annual round of applications for Public-Private-Partnership (PPP) projects in early June it has received 1070 applications with a total amount of 2.2 trillion RMB as of end July. The industries involved in these PPP projects include energy, transportation, hydraulic engineering and environmental protection. The total number of applications for PPP projects in 2015 was 782 while the number in 2014 was only 120. In the past, the MOF had set an application limit of 50 to be considered for each province when the number exceeded that. For those select projects, the central government will provide subsidies between 3 million to 8 million yuan while some local governments also provides subsidies.
Despite China's loudly trumpeted supply side reform, core of which is urging primary commodities companies to cut production, oversupply in the steel sector has become even more serious. Hebei province, known as the steel producing center of China, has seen 2.05% growth in crude steel and 5.14% growth in processed steel production in the first half of 2016. Concerns over widespread unemployment, bad loans and asset losses have led local and provincial governments to eschew making real commitments to national supply side reforms.
Chinese media observes that Chinese securities companies are experiencing a transition of their business models. A number of leading securities companies have not renewed marketing contracts with tradtional stock brokers but are looking to rely on the internet to help clients open accounts. Huatai Securities, Founder Securities and Ping'An securites are industry leaders in the shift to tap the internet for client acquisition. The strategic shift will hardly be able to address all the potential problems inflicting the industry, however, including the lack of professional advisors and low investment returns for many investors.
According to Chinese media, the World Bank, National Development Bank (NDB) and ICBC Asia will be the first issuers to issue SDR-denominated bonds, all via the Shanghai Free Trade Zone. NDB will choose the SFTZ as the place to issue SDR bonds totaling between 200 million to 500 million SDRs with a tenor of six to 12 months. In June 2016, NDB had set up its headquarter in Shanghai.
China is boosting use of the Shenzhen-Hong Kong Stock Connect by internally setting up a specialised team for this project within the CSRC. The team, lead by Fang Xinghai, the vice chairman of CSRC, will be responsible for the communication between authorities from Hong Kong and China. The members of the team are from 15 departments and include representatives from the Shenzhen Stock Exchange, Shanghai Stock Exchange as well as the regulator's law department, accounting department and others. Charles Li, Chairman of HKex, said yesterday that technically, Shenzhen-Hong Kong Connect is ready. Chinese securities companies expect the Stock Connect to be approved in Q3 and officially launch in Q4.
China now is the country with most outbound expenditure globally. 2015 saw 120 million outbound visits by Chinese tourists with an average expenditure of 11,624 yuan, due to a stronger RMB against some currencies and simplified visa application process, according to CNTA (China National Tourism Adminitration). Visitors from second tier cities such as Changsha and Suzhou contributed most, while inbound tourism was led by visitors from the US and France.
Shanghai has issued a new guidance on supply side reforms, focused on the future roles and direction of the Shanghai Free Trade Zone in the financial reform. The guidance calls for fast track establishment of a mature framework based on free trade accounts launched in the FTZ. The size of RMB financing is to expand, the guidance continues, and the channels will be broadened to offshore investors to increase RMB inflow and to boost cross-border RMB usage. Further, the threshold will be lowered for qualified private and foreign corporates to tap the local financial market, thereby strengthening the pricing power of Shanghai's financial market.
CSRC has released the rating results of securities companies on August 5. 58 out of 95 companies have been downgraded by the regulator in its annual review. The rating is based on risk management capability, competitiveness and takes into account any violations of regulations. Chinese analysts consider this last pillar to be the main reason for widespread downgrades, given CSRC's closer oversigh in recent monthst. The downgrade decisions will have a profound impact on Chinese securities companies, because those downgraded will need to pay a larger amount of money to the investor protection fund, reducing their profitability.
CFETS issued a new regulation on the interbank lending market, effective August 9. Under the new rules, CFETS integrates different entrance requirement applicabe to various types of financial institutions into a general threshold, meaning that all financial institutions fulfilling this uniform requirement can tap the interbank market. In addtion, CFETS shortens the processing period for approvals from 20 working days to 5 days. Chinese analysts expect that once the interbank market is liberalized, a number of rural financial institutions will enter the market.
At 1.6 billion yuan inflows, the Hong Kong-Shanghai Stock Connect saw its biggest inflows for nearly a month on August 9, helping the Shanghai Composite Index to remain above 3,000 points. Among the popular stocks, Inner Mongolia Yili Industrial Group Co., Ltd. is the one with most net inflows. Three Chinese banks including ICBC, CMB and Industrial Bank are also in the top 10 list.
Chinese insurance companies face challenges on both asset and liability sides. According to CIRC, as of the end of Q2, ROI of insurance companies was 2.47%, down from 5.16% for the same period last year. Total profit of insurance companies also decreased by 54%. Most blame increasing market volatility for underperformance. Chinese analysts expect that due to lack of investment choices, insurance companies are likely to invest more in Chinese A-share markets especially in large-cap blue-chip stocks.
According to Wind, as of end of August 8, 16 listed property companies in China have released their interim results. Total revenues of these 16 companies reached 213.7 billion yuan in the first half of 2016, up 31.5% from the same period last year. In terms of bottom line performance, on average, each of those 16 companies made a daily profit of 3.38 million yuan. The profitability increase is attributed to rising prices in the Chinese property market, especially in the second tier cities.
Chinese media received information from AMAC (Asset Management Association of China), saying that AMAC is designing new regulations governing the PE industry. The new rules will be on record keeping, fund raising, internal risk management, information disclosure, and professional qualifications. Chinese regulators are trying to abolish any grey area in the existing regulatory framework. The most significant rule is considered to be with respect to professional qualifications. All employees involved in the investment decisions in PE firms will need to have obtained at least 3 years experience in securities management, according to the new rules. Failing that, PE companies will not be allowed to issue wealth management products through securities companies.
Chinese media reports that China is speeding up its personal income tax reform. Under the current tax regime, different types of income (salary, commision, interest, etc.) can have different tax brackets, leading to unfair tax distribution towards people with the same amount of total income. Therefore, China is considering to adjust the weights of different types of income as well as adding total income as a factor in calculating the total tax payable. Another core change in the upcoming rules is that there will be tax deduction in accordance with the family burden.
Supply side reform is facing setbacks in China. As of the end of July, companies in the steel and coal industries have only completed 47% and 38% of the supply cuts targeted for the whole year respectively. A lack of confidence in the reform measures and low willingness among corporates to commit to supply cuts amid slowly rising prices are cited as the reasons. During a meeting of steel and coal industry players, Chinese regulators stated that no more new steel and coal projects will be approved this year and that local governments should take care of those workers that will see their incomes affected by the cuts.
Chinese media observed that for the first time since 2012, the country's central bank did not make remarks on regional financial risk in its quarterly monetary policy report, issued last Friday. Instead, the PBOC included the phrase "defend the bottom line against systemic risk" in its report. Chinese analysts have different interpretations on the minor change. Some reckon that the PBOC will allow more bankruptcies to occur in some highy indebted industries. Others assert that the change is due to the fact that the developments in IT and the financial industry at large have linked the region's financial markets closely together. In addtion to that change, the PBOC also reiterated its stable monetary policy goal, signalling a small possiblity to implement a rate decrease in Q3.
Foreign banks including HSBC, Standard Chartered, Citi, DBS and BEA witnessed profitability declines in their Chinese retail business in 1H16, attributale to the economic growth slowdown in China. Compared to their local Chinese peers, foreign banks have a smaller branch network to collect deposits and attract customers. Foreign banks are trying to transition their business by offering more digital finance products and grow fee income through credit card issuance and wealth management offerings.
CSRC is considering a modification of the over-the-counter National Equities Exchange and Quotations market, which is considered the "third board" in China's equity market. The new standard will affect IPO requirements, private placements and financial reporting disclosure in the market. Currently, there are more than 8,000 companies listed on the National Equities Exchange and Quotations market, often with less robust cash flow performance than those listed on the Shanghai or Shenzhen main boards. According to Chinese media, the new regulation is a reflection of CSRC's efforts to supervise the market and reduce the number of unqualified companies easily available to investors.
SAFE released trade balance figures for the first half of 2016, which show that in Q2, foreign reserves declined 224.2 billion yuan compared to a 844.3 billion yuan drop in Q1. This corroborates reports that capital outflows through mis-invoicing and similar techniques have slowed in Q2 as a result of stricter capital controls. At the same time, global demand for Chinese goods and services also picked up in Q2. Data from SAFE shows that the trade surplus has increased to 387.9 billion yuan, versus 256.9 billion yuan in Q1 .
According to data from Z-Ben Advisors, a Shanghai based consulting firm, as of the end of the first half, around 90% of the QDII quota issued until now has been used up, due to growing interest in overseas markets among Chinese investors. For comparison, in 2014 and 2015, the utilization of the quota stood at only 50% and 67%, respectively. 90 out of 156 QDII funds have reported a profit in the second quarter. Among all funds, gold funds and REITs outperformed others, with a 5.1% and 4.17% growth, respectively.
CBRC has issued a guidance to banks with respect to credit growth, urging banks not to arbitrarily stop lending. Analysts note that more frequent defaults in loan and capital markets recently have strained relationships between banks and corporates. As a result of risig NPLs, capex plans in the private sector has been under pressure, an issue that the guidance seeks to address.
Since NDRC (National Development and Reform Commision) held a press conference on 20 July, its official website has published five articles by experts from different industries emphasizing the importance of high speed rail projects. The projects may boost upstream and downstream industries in infrastructure and are regarded as one of the most effective approaches to fight headwinds from the economic downturn. Transportation, infrastructure, tourism and other parts of the value chain of the manufacturing industry are expected to benefit from high speed rail projects. In 2015, the Beijing-Shanghai high speed rail project reported a 6.6 billion yuan profit.
Following Didi's acuisition of Uber China, Shen Dangyang, spokesperson of MOFCOM (Ministry of Commerce) stated that the ministry has yet to receive an official notice detailing the transaction. According to Chinese anti-trust regulations, both the buyer and seller in most M&A transactions need to report to MOFCOM prior to the transaction taking place, says Shen. Some media reckons Didi's failure to inform the regulator has to do with insufficient revenues of Uber China.
A new system has been launched in China that aims to consolidate securities (equities) accounts and futures accounts of investors into a single account, improving supervisory capabilities of the CSRC and other regulators. Newly opened futures accounts will be registered with the China Securities Depository and Clearing Corporation Limited (CSDC), meaning that CSDC can keep track of trades in both stock and futures markets and flag suspicious accounts if necessary. Stock index futures were among the principal causes to trigger the A-share market crash last August.
According to data from China Central Depository & Clearing Co., Ltd. (CCDC), bonds issued by non-Chinese insitutions in 1H16 amounted to 60.96 billion yuan, nearly equal to the full year amount of 2015. Data from Dealogic also shows that as of the end of 1 August, panda bond issuance has summed up to 49.7 billion RMB, six times the total issuance of 2015. According to China Banking Association, the liberalization of the Chinese bond market is boosting RMB internationalization and can help establish an equilibrium exchange rate of RMB.
BOC Shanghai Branch announced it opened an account for the New Development Bank (NDB) in the Shanghai (Pilot) Free Trade Zone, the first one set up for a multilateral international financial institution in the zone. BOC also completed its first CCS (cross-currency swap) for the NDB. The swap involved USD and RMB, with an unspecified amount and a tenor of 5 years. The new account opening is a landmark event for the SFTZ, which aims to be a platform to link the onshore and offshore markets.
Chinese media received an official document from an undisclosed Chinese commercial bank, stating that it will cease funding to any large property development projects. The move was not triggered by any CBRC regulation, the media points out and reckons that an internal risk management adjustment caused the decision. At the same time, Chinese real estate developers worry more about possible stricter regulation from the CBRC in the pipeline, which once issued, will lift their funding cost significantly.
China Universal Asset Management Co listed the first ETF tracking the CSI Shanghai SOE Index. Official documents from the Shanghai Stock Exchange show that Shanghai SMI Holding and Shanghai Jiushi Corporation, shareholders in Shanghai International Port and Shanghai Jiao Yun Group respectively, will exchange their shares in the two SOEs with a stake in the ETF. Chinese analysts expect the establishment of the new ETF will help SOE reforms by attracting more shareholders in Shanghai SOEs to invest in the ETF. According to Wind, a Chinese financial data provider, as of the first quarter of 2016, the CSI Shanghai SOE Index has risen 72.8% since 2013, higher than 45.25% of CSI 300 index within the same period.
Analysts in China reckon that CBRC's latest regulation of commercial banks' investment channels, issued yesterday, primarily targets the overheated property market. New rules stipulate that only wealth management products with over 5 billion yuan in net asset value are allowed to invest into equity or use a trust to lend to issuers (including properrty developers). According to estimates by China Securities, the new regulation will reduce overall equity investment by WMPs of commercial banks by 20% (worth 200 billion yuan) and reduce lending by 20% (worth 1 trillion yuan).
An official document from Shenzhen-listed Dalian Dayang Trands announced yesterday that the application of a reverse takeover by YTO Express (Logistics) Co of some of its assets has been conditionally approved by the CSRC. The enlarged company will keep trading under the same name. So far, most large Chinese logistics companies have announced plans to tap the A-share market through backdoor listings, including SF Express, YTO Express and STO Express. The rapid development of the logistic industry is in line with the growth in China's e-commerce market.
PSBC announced it has closed 52 branches since April, citing the development of online banking business and declining profits of tradtional brick-and-mortar branches. Nine of the closed branches were located in Shandong province and were shut between mid May and mid June. PSBC is currently seeking approval for a Hong Kong IPO that is thought to raise around US$7 billion.
ICBC Asia is considering to issue a SDR denominated bond, Chinese media reports. According to sources, the Hong Kong incorporated bank seeks to raise 1 billion SDR with the issue. The pricing of the bond will depend on the weighted average interest rate of USD, EUR, JPN, GBP and CNY, to be determined after the CNY inclusion in September. Several tranches denominated in each of the SDR currencies will be available to institutional investors, sources say, with the possible issuance date in October.
Chinese media disclosed the CBRC's latest regulation of commercial banks. Under new rules, commercial banks are prohibited from issuing structured asset management plans. The new regulation also restrict the use of the funds collected from wealth management products. The funds raised cannot be invested in wealth management products or credit assets of the bank itself. Instead, funds are to be invested only in money market funds or the onshore bond market. For each commercial bank, the asset pool of asset management products should not be larger than 140% of the bank's net assets.
During yesterday's regular meeting of the State Council, Premier Li Keqiang revealed that the overall tax burden for Chinese companies has successfully decreased but that for some financial institutions the tax burden has increased. Li expressed that China will work hard to make sure that the financial industry can also enjoy tax benefits from the VAT reform by providing clearer guidance with respect to tax deductibility.
Chinese media observe that since the CSRC begun regulating the stock market more tightly to avoid a repeat of the August turmoil last year, both the trading volume and the volatility of A-shares have shrunk significantly. The 10-day realized volatility of monthly CSI 300 futures bottomed in the single digits this week, down from more than 110 points just a week earlier. That is the lowest level since 1992. However, investors still consider the market to be a driven by speculation. Some have thus moved to invest in wealth management products, reducing trading volumes on regulated exchanges.
China's 32 provinces have been disclosing their GDP growth rates over the past ten days. As of 26 July, however, five provinces have yet to do so, including: Heilongjiang, Liaoning, Shanxi, Ningxia and Xinjiang, most of which are in northeastern China. Chinese media attribute the delay of their announcement to the financial difficulties these provinces are facing. 1H15 growth in these five provinces was slowest in the country, due to industry concentration in coal and steel sectors.
Confronted with an increasing number of default cases since the end of June, local arms of the CSRC have gradually issued regulations towards securities companies requiring tighter control over corporate bond issuances. Growth in the corporate bond market has outstripped development of the risk management and regulatory frameworks. Regulators also criticize that securities companies focus too much on their brokerage business and fail to pay proper attention to due diligence. Pressure on fees in the industry is to blame partly, they add.
Securities companies will face larger penalities if they ignore the importance of risk management, according to Chinese media. Penalities can also include having the sponsor/underwriting licences revoked. Any failure to complete due dilligence in transactions or, worse, presenting knowingly fraudulant or misleading information to investors will draw more stringent punishment. Regulators also said that not only the underwriting firm would be subject to regulatory retaliation but that the persons having signed the supporting documents of any transaction deemed faulty will be subject to legal prosecution.
Chinese media observes that China has been under investigation for price dumping and subsidiaries for 21 and 10 years respectively, making it the coutnry most frequently investigated by various courts around the world. As the media calculates, since the beginning of 2016, China has been accused of dumping or subsidiaries once every three days. The US and India made most complaints among all countries, most often with respect to the steel industry. At the same time, China is slammed with G20 protectionism more than most other G20 countries.
Since their establishment last July, five state-owned mutual funds have realised a paper gains of 3.9 billion yuan in the past 12 months, despite the volatile A-share market. In the second quarter, the five funds decreased their exposure to equities. By industry, manufacturing and the financial services sector were most heavily represented in their portfolios. Inner Mongolia Yili Industrial Group Co is the only stock owned by all five, which have thus all benefited from the stock's 26% increase in Q2.
The G20 meeting was held on July 23 and 24 in Chengdu. Zhou Xiaochuan, chairman of the PBOC used the forum to reiterate the central bank aims for the renminbi to maintain stability against a basket of currencies. Zhou also revealed that China is considering the feasibility of introducing a SDR-denominated bond, without revealing specifics. Meanwhile, Lou Jiwei, minister of finance, says that the next focuses of the broader tax reform currently in action will be the property and income taxes.
SASAC announced that four SOEs have sponsored an asset management company to deal with overcapacity in their industry. The four SOEs are China Reform Holdings Corporation, China Chengtong Holdings Group, China National Coal Group and Shenhua Group Corporation. The new company is mandated to restructure the assets in the four equity sponsors to address oversupply. Chinese media reports that since the start of 2016, over 120 SOEs have released a reform plan publically, a majority of which involve M&A transactions.
A recent transaction on the Shenzhen stock exchange shows the door has not completely shut on reverse takeovers in China, despite the CSRC's stricter regulations on this issue. Two Shenzhen-listed companies, Xinjiang Tianshan Wool Tex Stock and Stellar Megaunion Corporation, announced last week that the applications of their buyers for a reverse takeover have been unconditionally and conditionally approved by the CSRC, respectively. The buyers are Beijing Jialin Pharmaceutical and H&R Century, respectively. Chinese analysts explain that the objectives of the new M&A rules are not to drive all companies away from reverse takeovers, and that those fulfilling the requirements with respect to profitability and information disclosure can still take the unconventional route to public listing via reverse takeovers.
Xiang Junbo, chairman of CIRC, criticized a number of undisclosed insurances companies for their aggressive investment strategies. According to him, some insurers treat insurance policies as a low cost financing tool without paying due attention to balance sheet expansion and deviating from their main business. Xiang urged the whole industry to prevent risk levels from rising and to invest into safe and stable assets. Xiang also mentioned that the return of investment from insurance companies was 2.49% for 1H16, down 2.81 percentage points from the same period last year.
Xiao Yaqing, director of SASAC (State-owned Assets Supervision and Administration Commision) tells Chinese media that China is speeding up its supply side reform to deal with oversupply in coal and steel industries. Coal and steel supply will shrink by 10% within two years, according to him. Nonetheless, he stresses that the process cannot be rushed since 50% of total SOE assets are tied up in capital-intensive industries.
China Investment Corporation, China's sovereign wealth fund, reported a 2.96% loss in 2015, down from a +5.47% return in 2014, according to its latest full year report. According to the Official Monetary and Financial Institutions Forum, the AUM of the fund manager increased US$94 billion in 2015, making it the fifth largest SWF in the world with a total AUM of US$746 billion. China's foreign exchange reserves are the main funding source for the SWF.
The National Development and Reform Commission stated in a press conference that all railway projects in China are open to both public and private investors including both domestic and foreign investors. NDRC also encourages railway builders to issue bonds for their projects in order to reduce financing costs. In addition, land development projects are also open to private investors and foreign investors, it said.
AVIC Real Estate Holding Company, a subsidiary of China National Aviation Corporation (Group) Limited, annouced that a significant amount of its property assets will be acquired by Poly Real Estate Group, one of the top four real estate developers in China. Poly just completed a 9 billion yuan financing round to expand its business. For the first half of 2016, Poly has seen 100 billion yuan in sales, putting it on track to achieve its full year sales goal of 200 billion yuan.
Charles Li, chaiman of HKEx said yesterday that a planned clearing link between the Hong Kong stock exchange and the Londom Metal Exchange has been put on hold due to Brexit. There are more uncertainties in the different regulatory frameworks in Hong Kong, Europe and the UK, he noted. But according to him, Brexit will not have a direct impact on other product strategies of HKEx. Currently, it is pressing ahead with LME certified commodity warehouses in mainland China, which could address issues with fake warehouse receipts that led to a fallout in commodity financing in 2013.
Shanghai (Pilot) Free Trade Zone will pilot the institution of a single regulatory body with an integrated monitoring system to cover all financial services in the zone. In practice, that will mean all established regulatory bodies, including PBOC, CSRC, CBRC, CIRC and their members, will report to a central IT system to bridge existing databases.
Following yesterday's news Dongbei Special Steel Group is to default on its debt, investors in China today welcome more positive news. Yunnan Yunwei Company Limited, a cash-strapped Yunnan based SOE, has announced in a filing to the Shanghai Stock Exchange that it would pay back its debt in advance. The news follow just one month after its restructuring had begun. Early repayment of principal and interest was proposed by two stressed local government bond issuers, in Hebei and Hainan provinces, in April but investors rejected the proposed timetable. Chinese analysts believe that recovery rates of stressed SOEs differ among different regions and those in the northeast are in the worst condition.
Chinese media observes that fundraising activities of start-up companies has cooled in 1H16. The amount raised from venture capital providers was just US$1.3 billion, half of the amount of 1H15, while early stage seed investment, angel investment and similar types of financing amounted to just 33%, 21% and 45% of the same time last year. Chinese analysts believe that the funding slowdown presents an opportunity to refocus investment on those companies with a track record of profitability and potential.
The State Council has issued a guidance that outlines the specifics for widescale debt-for-equity swaps designed to substitute debt obligations to banks by leveraged corporates with equity in these debtors. It signals the beginning of a three-pronged approach to deal with elevated corporate leverage, especially among SOEs, to be carried out alongside more loan securitisations b banks and the creation of bad banks.
Following encouraging news that some SOEs in China's leveraged steel sector had turned profitable again in 2Q16, Dongbei Special Steel Group is facing fresh defaults on its corporate bonds, amounting to 4 billion yuan in total. Dongbei is one of the largest steel manufacturers and is based in northeast China. It had begun to default on interest payments on certain bonds four months ago, but no insolvency resolution has been found. Market analysts expect that the company will be among the first SOEs to see its debt swapped for equity held by its creditor banks. Most investors are against the step, according to Chinese media.
According to the PBOC, 14 financial institutions received funding from PBOC's MLF (medium-term lending facility) to the tune of 227 billion RMB late Monday. The MLF has become a favoured tool by the central bank to boost liquidity in the interbank market. MLF acts as a complimentary central bank tool, aside from the standing lending facility (SLF), pledged supplemented lending (PSL) and the long term refinancing operations (LTRO).
CSRC has issued an updated offical regulation on asset management for securities companies, reducing the permitted leverage that these companies are allowed to build up when issuing structured fixed income notes. Structured debt notes' senior tranches can only be 3x the size of junior notes, compared to 10x before the rule. Meanwhile, new leverage restrictions will also apply to equity and mixed-asset portfolio managers. The detailed regulation (in Chinese) is here.
In a bid to motivate staff of listed companies, CSRC has released a new guidance on employees' stock ownership programs, effective August 13. The new guidance seeks to improve information disclosure while also reducing internal requirements related to the award of stock options. According to CSRC, as of end 2015, 808 companies had created their own employees' stock ownership programs as a way of motivating staff. They work best companies in the technology and startup industries.
CSRC is collecting input from the public on proposed new rules governing the Futures Industry Protection Fund. The proposed amendment includes the cancelation of a fund ceiling at 800 million yuan, reducing the mandatory contribution rate by futures exchanges and its members altering the contribution frequency from quarterly to annual basis. The fund, similar to the larger Securities Industry Protection Fund, is designed to protect investors in the event of failure of a client or broker.
CBRC is now collecting opinions from the public on its new guidance on IT standards in the banking sector. In the new guidance, the banking industry is encouraged to participate in more fintech projects and help build a fintech ecosystem. In addtion, the guidance also motivates banks to deploy more use of big data and cloud-based processes. The new guidance signals regulatory efforts to entice more direct competition and 'co-opetition' between banks and fintech companies.
According to Chinese media, CSRC has implemented new M&A regulations and started to impose financial checks both on firms already listed through reverse takeovers and those currently in the application process for a backdoor listing. 98 companies, as reported, are now under investigation by CSRC, including companies labeled as ST (special treatment) stocks and US listed companies wishing to tap the A-share market through a spin-off from a VIE structure (such as Digital China). 40 securities that acted as financial advisors in these transactions are also under investigation. Huatai Securities, South West Securities and Haitong Securities advised 14, 10 and 8 reverse takeover cases, respectively.
SASAC announced today that Chinatex Corporation, a state-owned food producer, was merged with another large SOE, COFCO. Chinatex will henceforth operate as a subsidiary under COFCO, and will no longer be supervised by SASAC. The merger is the second merger between two sizeable SOEs, following the merger between CIT and HKCTS on Tuesday, signalling China's ambition to speed up the SOE reform. According to SASAC, it aims to cut the number of SOEs to less than 100 by the end of this year. Currently, there are 5 to 10 SOE mergers in process.
The National Bureau of Statistics announced today that GDP growth in Q2 was +6.7%, the slowest growth since 1Q09 but better than the expected figure of +6.6%. Much of the growth was attributable to domestic consumption as for the first half of the year, growth in consumer goods sales was +10.3% while the number for fixed asset growth was only +9%. It is also noteworthy that property investment has started to cool down, with a nominal growth of +6.1% in H1, slower than the growth of the first five months. Chinese analysts attribute the stable GDP growth to the economic transition and supply side reform.
China's trade surplus recorded miniscule gains in Q2, up +0.1% qoq after posting a -6.9% decline in Q1. Net exports in 1H16 are still down from the same period last year. Huang Songping, spokesperson of China Customs, explained that the reasons for the slight uptick are greater regulatory support from the government, the One Belt One Road initative and stable commodity prices. Huang also expects that China will see further growth in the second half of 2016, as the global demand recovers.
Chinese media observes that stock codes of a number of urban commercial banks are already accessible on the website of the Shanghai Stock Exchange, even though these banks have not listed. They include Bank of Jiangsu (600919) and Bank of Shanghai (601229). No urban commercial bank has tapped the mainland Chinese equity market in the past ten years. Instead, many of them preferred Hong Kong, including Bank of Chongqing and Harbin Bank. According to the CBRC, urban commercial banks saw profits decline and NPLs increase in 2015.
Yin Weimin, Minister of Human Resources and Social Security, stated that a new retirement scheme postponing the retirement age will be issued by the end of this year, in a bid to deal with the aging society. The official retirement age in China is 60 years for men and 50-55 for women. According to Yin, China is now facing structural problems due to the demographic change in the economy. Companies are struggling to find suitable employees for high-end jobs while fresh graduates and those less skilled workers find it difficult to get a job in China.
MOFCOM expects the Chinese e-commerce market to continue its rapid growth, with sales volume to reach 43.8 trillion yuan by 2020. At an average annual growth rate of 15%, the volume of goods (including non-consumer goods) sold on electronic platforms will then be nearly as large as the entire market for consumer goods (est. at 48 trillion yuan) sold through all channels. MOFCOM expects that e-commerce will also be a driving force for China's economic transition and innovation.
According to Choice Data, a financial data provider, all of the 25 Chinese securities companies listed in the A-share market faced declining profits year-on-year in the first half of the year. Although all of them continue to be profitable, not one of them was able to increase income compared to 1H15, when the A-share market boomed. Among the firms, Citic Securities continues to lead by profitability, followed by GTJA Securities and Guangfa Securities.
Pressure on Chinese steel companies has abated in 2Q16. Chinese media reports that a number of firms in the industry have been able to turn losses into profits in the second quarter. Among them is Gansu Jiu Steel Group Hongxing Iron & Steel, which had posted quarterly losses of nearly US$600 million in the last quarter of 2015. Steel companies explained that the reasons for increased profitability are the government's support in supply-side reform and the rising steel price.
SAIC (State Administration for Industry and Commerce) issued its first regulation on internet advertisement, effective September 1. The new regulation considers various types of sponsored results (including links on search engines and product listings on e-commerce websites) as advertisements. The classification will have an effect on tax expenses by such IT giants as Alibaba and Baidu, which offer clients sponsored links and featured product listings. Analysts thus expect profitability of these companies to take a hit. The rules also stipulate that such forms of advertisements for medicine and tobacco products are subject to approval.
SASAC (State-owned Assets Supervision and Administration Commision of State Council) announced yesterday that CIT Group Corporation, a state-owned travel agency, was merged with another large SOE, HKCTS. CIT will henceforth operate as a subsidiary under HKCTS, and will no longer be supervised by SASAC. The merger signals China's efforts to create a single large SOE in the travelling industry, regarded as a competitive market with almost no entry barriers in China. Market analysts stated that M&As in competitive markets conformed to current SOE reform and can maximize the benefits from vertical integration.
PWC predicts that the number of new IPOs in the A-share market in the second half of 2016 will be similar to the first half of the year, accruing to a total of about 120 A-share IPOs in 2016. According to data from authorities, 68 new companies were listed in Chinese stock exchanges in 1H16, down 60% yoy due to more restrictive IPO regulation implemented by CSRC in January this year. CSRC has also been punished listed firms more actively for infringements of securities laws. On July 8, for example, CSRC mandated the delisting of Dandong Xintai Electric Co (300372.SZ), because the company had published fraudulant financial information.
Chinese media observes that Chinese investors regard football as an attractive overseas investment. For the year 2015, there were 33 M&A cases worth more than 10 million yuan in overseas market originated by Chinese investors. So far, Chinese investors have acquired more than 10 foreign clubs in countries including the UK, Italy, Spain, France, the Netherlands and Australia. Chinese analysts value these investments due to brand value and advertisement income despite the long-term commitment these investments require.
Data from the National Bureau of Statistics shows that in June, the national CPI edged up 1.9%, down -0.1% from May while PPI was down -2.6%. The expansionary monetary policy did not affect the overall price level much, thus analysts expect that there is still room for further rate cuts in China. Analysts also express little worry about the deflation risk as the PBOC continues to inject liquidity into the market.
The National Audit Office has issued an annual audit report for the year 2015, showing significant progress in system improvement and a lower number of spending misconduct. Although SOEs still incurred more than 10 billion yuan in losses due to poor planning and expense management, the report also notes that unnecessary expenses and losses worth a total of 608.3 billion yuan were avoided as a result of improved auditing process. The National Audit Office has issued 23 audit reports in key industries such as aviation and insurance in recent months.
PBOC has announced that the official foreign reserves in June were US$3.2 trillion, up US$13.4 billion from a month earlier. Analysts attribute the slight increase to tighter FX controls and thus slower capital outflows. Chinese analysts do not believe the yuan's depreciation will be prolonged due the persistently large trade surplus and larger divergence between the interest rates of China and the US.
China is fast tracking securitization of state-owned assets as an important aspect of its SOE reform package. SASAC (State-owned Assets Supervision and Administration Commision of the State Council) is said to pick three to five SOEs in a first batch of companies that will securitize some of their subsidiaries' assets. An investment holding company under the same group will be the sole investor in these assets and will subsequently go public. Chinese analysts estimate that around 30 trillion yuan worth of state-owned assets will thus be injected into the A-share market, where they will be subject to market forces rather than the state
According to Chinese media, 424 Chinese companies have annouced or completed M&A deals for the first half of 2016, valued at around 1.57 trillion yuan. Among them, 42 companies paid more than 10 billion yuan in these transactions. However, at least 40 companies intentionally gave up their M&A plans even though they already completed the information disclosure process. Analysts attribute tighter regulation on reverse takeovers by the CSRC as the primary reason.
In light of continuous RMB depreciation, CFETS (China Foreign Exchange Trade System) has issued a circular on margin requirements for foreign participants in the interbank FX market, effective 15 August. Under the new circular, qualified offshore institutions should deposit a 20% margin of their last month's net position of FX forward contracts, subject to no interest rate. The revolving margin deposit should be posted to their account with CFETS by the middle of each month and cannot be withdrawn for one year.
CSRC has published a report on China's general financial environment in terms of integrity. The report shows that in 2015, there were 2,417 cases of illegal or dishonest conduct, up 41% from 2014. Most of these relate to information disclosure (50%) and insider trading (23%). The regulator attributes the rise in numbers to its greater monitoring efforts and commitment to crack down on illicilt activities. According to CSRC, 2015 was the tenth year since it started a concerted scheme to promote integrity.
China's banking sector watchdog, the CBRC, has issued a guidance requiring the creation of the position of chief risk officer (CRO) in large banks. The CRO should be a member of the senior management team and invested with the responsibility to build a risk management compliance structure for the institution. The guidance also includes a requirement for banks to review their risk management strategies at least once a year. CBRC is seeking public comment on the guidance.
Chinese securities companies underwriting IPOs have started to re-examine the companies looking to list in the A-share market, with a focus on their financial performance and disclosure. CSRC hopes to reduce the current number of pending IPO applications by a third, Chinese media reports. That would be nearly 300 of the companies currently waiting to get approval. Analysts have called the review the most rigorous ever conducted. The CSRC has argued that companies with low profitability and low growth prospects should be excluded from the IPO pipeline at an early stage.
Part of the wider SOE reform package, employee stock ownership plans will kick off in a number of state-owned enterprises, according to Zhang Xiwu, vice director of SASAC (State-owned Assets Supervision and Administration Commission of the State Council). While the country's largest SOEs will not yet participate in this first round of the pilot project, 10 of their subsidiaries as well as 10 SOEs per province have been selected. Employee stock ownership is not a new concept among China's SOEs, having been tried in the 1990s but abandoned soon after due to poor performance and mounting losses by the SOEs. 28 provinces have issued reform guidances stating that employee participation is a key to improved performance.
Ctrip, the largest OTA (Online Travel Agent) in China, has acquired a 3.22% stake in China Eastern Airlines, responding to Alibaba's collaboration with HNA Group (owner of Hainan Airlines and HK Express). OTAs have long been considered as a threat to airline companies in China as Chinese customers are now able to compare ticket prices between different airlines easily. However, the trend towards different oligopolies among OTAs and airlines could help vertical integration of the industry. What it means to price transparency for customers, on the other hand, is unclear.
Premier Li Keqiang wants China’s state-owned enterprises to build their core competencies and upgrade their businesses by using technology. In a speech before SOEs in a Beijing forum, Li said that China's SOE reforms should be in line with the market economy, eliminating outdated businesses and consolidating companies in industries where there is overcapacity. President Xi Jinping in the same forum added that SOEs are expected to play a role in the transition of China’s economy to one that is consumer-driven. Xi said that protecting the value of SOE assets is a key focus in the reforms.
Uber, the second most popular ride-hail application in China next to Didi, is struggling in the country. The subsidies spent on the business to defend its market share is hurting profitability. According to Chinese media, China accounts for a third of Uber's total business, but it has brought a $1 billion in losses for Uber. According to analysts, Uber will continue to face stiff competition in the mainland.
CSRC chairman Liu Shiyu told the Hong Kong Commercial Daily that the actual launch date of the much-anticipated Shenzhen- Hong Kong Stock Connect is still uncertain, due to technical issues. Liu could only confirm that it will be available by the end of this year. While Hong Kong Stock Exchange already tested the port-to-port system on 27 June, some market analysts have questioned why no official announcement was made with a launch date since then.
CIRC has released an updated version of its rules on the investment use of funds by insurance companies. Insurance companies in China will be allowed to invest their funds into a broader range of infrastructure projects, the update reads. In addition, joint investment by government vehicles and insurers are encouraged in order to help diversify risk. Insurance companies will no longer need to get approval for investment in certain projects going forward; instead, CIRC will only monitor regional systemic risk.
China's State Council has issued a circular, outlining steps to boost private investment in China's economy. The focus will be to maintain fair competition, thus giving private sector companies access to the same benefits that SOEs retain. Specifically, explicit and implicit entry barriers prevailing in airport construction, telecommunications and oil & gas exploration will be abolished, the circular reads.
In a new report, Deloitte estimates that China will lose its position as the largest manufacturing country in the world by 2020. The US will take the lead, thanks to its push in "Industry 4.0". In addition, China is to lose its competitiveness in labor cost, which have surged fivefold since 2005. Other emerging countries including Malaysia, India, Thailand, Indonesia and Vietnam will also feature in the top 15 of manufacturing countries, the report says.
According to Chinese media, the approval of M&A transactions will become more difficult. Until now, applications that were not declined either passed "unconditionally" or "with conditions". The new framework, announced by the CSRC without an effective date, will abandon the latter category, hence only approving or declining applications. The CSRC wants to avoid unclear results, as 70% of applications for M&A transactions in the past were passed "with conditions". In the future, every application that does not fit the "unconditional" category of approval will be denied.
Lou Jiwei, Minister of Finance, reiterated the goal to work towards a fiscal surplus this year during a meeting of the Standing Committee of the National People’s Congress, but the downturn of the Chinese economy presents challenges. For the year 2015, the government reported a year-end fiscal deficit of 1.12 trillion yuan, which was anticipated by the budget. The ministry will continue to employ proactive fiscal policy, especially focusing on supply-side reform, he said. He also mentioned tax cuts for corporates are considered as part of a broader reform of the tax regime.
The Chinese Academy of Social Science, the State Information Center, Bank of Communicatin and Bank of China all predict China's GDP to have grown by 6.7% in the first half of this year. Experts in these institutions warn, however, that much of the growth is attributable to the real estate sector rather than the real economy. Expansionary monetary policy thus appears to fail to reach the intended recipients.
Out of 27 Chinese securities companies with an "AA" rating, 14 have been reported to be involved in illegal activities since the beginning of May, mostly related to failures with respect to KYC issues. This is likely to have consequences for their credit rating, Chinese media reports. Large securities companies like Haitong, Guangfa, Huatai and Founder may be downgraded. The CSRC is due to announce the results of its annual credit review of securities companies in early July. A credit downgrade, decided by a committee of experts from the CSRC and the securities companies themselves, will influence the financing cost as well as the financing approach of these securities companies, according to Chinese analysts.
According to British property agencies, investors from mainland China, Hong Kong and Singapore view Brexit as a buying opportunity in the local housing market. The real estate market in the UK is among the most expensive ones in the world, with a garage near King's Cross Station recently fetching more than GBP1 million. According to KPMG, though, housing prices may drop 5% as a result of the decision to exit the EU.
According to Chinese media, Chongqing and Guangxi provinces are expected to be included in the third batch of free trade zones, aiming to introduce liberalisations in various sectors. Some of the chosen regions within the provinces have already gone through the application process, media reports without specifying further. Currently, Shanghai, Tianjin, Guangdong and Fujian provinces are home to around 20 free trade zones that test a number of reforms targeting financial services, logistics and other industries.
It is expected that the link between stock exchanges in London and Shanghai will be launched in September, starting with less than 10 GDRs issued by Chinese bluechip companies in London. The collaboration is regarded as yet another approach to attract foreign investors for Chinese A-share market. Deutsche Börse and the SSE had also agreed in May that a new joint venture, named China Europe International Exchange, will be listing securities such as ETFs based on Chinese underlying assets. There is also talk of Chinese companies issuing so-called D-shares (Deutschland shares, German depositary receipts) on the Frankfurt-headquartered exchange.
In the face of further RMB depreciation, Chinese investors are looking to buy more foreign assets to hedge currency risk. According to Chinese media reports, investors are looking to allocate 9.4% of their wealth to foreign assets, almost doubling the current rate of 4.8%. The number of high net worth Chinese families is estimated to increase from 2.07 million for last year to 3.88 million in 2020; growing annually at 13%.
Liu Ti, head of the derivatives department at Shanghai Stock Exchange, said that they would provide more types of products and were considering introducing the CSI 300 index as an option. There are also plans to lower the cost for trading options, according to Liu the commission fee would be lowered to around half the current rate of 2 RMB per contract.
Premier Li Keqiang expressed confidence in the current exchange rate policy and stated that the RMB should keep following a stable pricing strategy. According to him the exchange rate reform has already proved it was able to maintain the stability of RMB within a reasonable range, instead of stimulating exports by solely depreciating the RMB. In addition, the reform makes the movement of RMB more transparent.
According to a white book issued by property agency Global House Buyer, China overtook Canada to be the largest buyer in US property market spending an average of $832,000 on US houses. The strong interest was the result of good returns and low risk of the US housing market.
Looking return to China instead of being listed in the US, Chinese companies have looked to privatize and relist in the on the Chinese A-share market. However, this may be a challenge due to the tightening of Chinese M&A regulations in regards to reverse takeovers. According to analysts, Chinese regulators are afraid that the sudden return of US listed Chinese companies would impact the overall A-share market, due to their attractive higher valuation.
Speaking at the WFE (World Federation of Exchanges) hosted by Shanghai Stock Exchange, chairman of CSRC, Liu Shiyu stressed that the capital market plays a vital role in China’s current five year plan, and that the country will focus more on establishing a mature capital markets legal system, to better service the supply-side reform as well as to minimize financial risk. Liu also pointed out that it is more challenging for stock exchanges to fulfill the obligation of monitoring the market than to sorely provide a trading platform. In addition, the CSRC expressed its support to the collaboration between Chinese stock exchanges and international exchanges.
CIRC announced that insurance companies are no longer allowed to issue "cash pool" type products. The "cash pool" type products by definition, are those with complicated tenor structures, pricing strategies without an independent individual account and are invested in the private market. The new regulation is regarded as another measure taken by China to manage overall financial risks.
In face of the slowdown of the private investment market, Chinese Premier Li Keqiang stressed the current need to motivate investment from private sector. At the Executive Meetings of the State Council, he mentioned that the Chinese government was trying to encourage private investment through structural reform such as the elimination of the state application process in these private investments.
The PBOC said it plans to allow qualified foreign companies to issue CDRs (Chinese Depositary Receipts) in China. Chinese media reports that CDRs were first floated as an idea by the PBOC as far back as 2002, but were not approved at the time because regulatory concern over market liquidity. Amid the RMB joining the SDR basket, however, more foreign investors are interested in China's capital markets, the PBOC finds. Hence, introducing CDRs has become feasible. On a related note, the PBOC reiterated plans to further open the financial market for domestic investor by launching a QDII2 scheme.
Speaking at the Lujiazui Financial Forum last week, Vice Chairman of PBOC Zhang Tao stressed that simply bailing out unprofitable companies is not conducive to the stability of the financial system. China should instead develop more exiting routes for such companies, by embracing bankruptcies channels including restructuring and liquidation. The market needs to play a larger role in asset allocation, he continued, helping to weed out unprofitable companies. His speech was made behind closed doors but a transcript was released yesterday.
China's securities markets are witnessing more intensive monitoring by the CSRC, Chinese media observes. Since May, the CSRC has been investigating intermediary agencies including law firms, asset valuation companies, accounting firms, and some investment banks, flagging insufficient due diligence and disclosure by these firms. This increases the risk of defaults. Stricter monitoring and regulation of these agencies serves to urge them to fulfill their obligations as "doorkeepers".
China's national railway operator CRC appears to be among the favoured bidders for the Kuala Lumpur–Singapore High Speed Rail. According to Chinese media, Malaysia minister of transport, Liow Tiong Lai, has been quoted to say that China has the most advanced technology in building high-speed rails and he is confident in their capabilities. Companies from South Korea, Japan and Europe have also expressed interest in the project. The tender is scheduled to open in July.
It is expected that the official announcement of Shenzhen-Hong Kong Stock Connect will be on 1 July, Chinese media reports, falling on the Hong Kong Special Administrative Region Establishment Day. The commencement date will then be three months after the annoucement, at the end of the third quarter or beginning of the fourth quarter this year. Compared to the Shanghai Stock Connect launched last year, the Shenzhen Stock Connect is drawing attention from high-tech firms and startups, seeking to tap Hong Kong's tech-savvy investor base.
Chinese banks' net FX forward contract balance was 8.6 billion yuan, the first time the number turned positive since December 2014 and signalling optimism for yuan appreciation among their clients. Analysts reckon that investors and corporates (exporters) are keen to lock in their US-dollar exposure now and thus cement their receivables in yuan terms, given the possibility of further Fed rate hikes or a "black swan" event such as Brexit.
The proposed SOE reform that will encourage private ownership of SOEs will be launched soon, Chinese media reports. Home to most capital-intensive SOEs, the country's northeast is expected to benefit most from the reform, a representative of National Development and Reform Commission (NDRC) said. The current ownership structure and industry distribution are believed to be major weaknesses for the region, the representative continues.
China's securities watchdog, the CSRC, is seeking public input on proposed new rules governing M&A transactions, with a special focus on reverse takeovers. The proposed changes include prohibiting secondary share issuances in public equity markets by those listed shell companies used by a large investor to go public. Furthermore, the rules propose a prolonging of the lock period for new shareholders from 12 to 24 months. It is hoped that the new regulations will discourage overvaluation of and speculation on shell companies. In the long term, the CSRC also plans on removing unprofitable shell companies from the A-share market.
JD.com, the second largest e-commerce platform in China, is rumoured to be in talks to acquire Walmart's stake in the online retailer Yihaodian. The acquisition is regarded as a crucial step for JD.com to expand their business in Eastern China. Walmart, on the other hand, hopes to liquidate its investment having failed to realize synergies from vertical integration after taking full control of the company a year ago.
The PBOC has entered into a cross-currency swap of 1.5 billion yuan and 27 billion Serbian dinar with Serbian central bank. The swap has an extendable tenor of 3 years to boost the cooperation of the two financial markets. Separately, the CFETS (China Foreign Exchange Trading System) announced last Friday that the South African Rand will be tradable against the RMB in China's onshore FX market, in a step to reduce exchange cost.
According to the Ministry of Commerce of the PRC (MOFCOM), outward FDI from China for the first five months was US$73.52 billion, up 61.9% from the corresponding period in 2015. A spokesperson said that the investment in overseas countries was stable in general but the bureau is investigating whether the larger demand for investment in foreign countries puts pressure on China's FX reserves. If necessary, MOFCOM will consider taking measures to cool down overseas investment.
Guotai Junan Securities, among the top three Chinese securities companies, has re-entered the securtities lending business with an estimated portfolio size of 100 million yuan since the A-share crisis last year. Securities lending was considered an important factor in the A-share collapse. GTJA is not the first securities company to restart their securities lending business. Earlier in February, 35 small securities companies already begun lending securities in order to tackle declining revenues. GTJA is the first sizeable securities companies to follow.
In an effort to tackle unclear allocation of responsibilities in issues related to corporate and public debt, China is planning to establish a new regulatory body, says Li Yang, a member of the Chinese Academy of Social Sciences and director of the National Institution for Finance and Development. Currently, MOFCOM, NDRC, PBOC, CBRC, CSRC, and CIRC all have some degree of oversight with respect to government, corporate and household debt. The purpose of setting up a new institution is to improve monitoring and managing growing leverage across the economy.
Didi announced today that it successfully raised US$7.3 billion in financing, including its recent investments from Apple and China Life. Didi, the taxi-calling app, is now considered the world's third largest "unicorn" company in the world, ahead of Airbnb. The latest round of financing also includes $4.5 billion in equity from Apple, China Life, Ant Financial, as well as returning investors Tencent, Alibaba, China Merchants Bank, and SoftBank.
Following up on a recent liberalisation by the PBOC that allowed easier access to offshore markets for cross-border financing by Chinese companies, SAFE announced yesterday that onshore companies (including both domestic and foreign ones) can access the FX spot market freely to convert their debt raised offshore. This reform follows trials in free trade zones of Shanghai, Tianjin, Guangdong and Fujian. Onshore companies will be required to open a capital account to deal with FX settlement and FX transactions with banks. A cap on the maximum transaction value of foreign debt issuance and related FX market activity remains.
Mutual funds investing in listed stocks in China experienced a good first half of the year 2016. According to data from TX Investment Consulting, dividend payments of these funds in China exceeded 80 billion yuan as of 13 June, which is the largest payout amount since 2007 while the dividend payout was only 75 billion RMB for the whole year of 2015. Equity funds outperformed all other funds as those successful fund managers liquidated their positions to lock up profits during the preceding A-share boom last year.
The Shanghai branch of the CSRC issued a circular on fintech activities to securities and futures companies. In the circular, the SEC defines investment by futures companies in P2P lending and P2P platform as illegal activities, considering them risky activities for futures companies. No restrictions are implemented towards securities and fund companies at the current stage.
It is expected that China will allow private ownership in SOEs on a pilot basis starting from this July, in order to improve the efficiency of SOEs. The reform will cover industries including crude oil, natural gas, electricity, railway, telecommunication, aviation, defense and etc. In addtion, state-owned projects with relatively higher entry levels will open to private investors as well. It is likely that China will push the reform in a gradual manner as usual despite barriers from people with vested interests.
The China Securities Regulatory Commission has asked securities companies to evaluate the integrity of their ventures with fintech companies. Securities, futures, fund companies as well as securities advisory firms and their subsidiries are expected ensure that they only deal with qualified fintech companies. They are also warned against potential breaches in CSRC regulations as they engage with fintech partners.
Data from National Bureau of Statistics shows that private investment in tangible assets for the first five months reached 11.6 trillion yuan, up only 3.9% from year earlier. The data reflect a weak industrial sector in the period. Meanwhile, housing prices are rising, indicating that capital could be returning to the property sector.
Didi announced that it received US$600 million investment from China Life and affirmed that they will continue their investment into fintech. The ride-hailing market in China has become a hot market for investors. Early this year, China Life invested in Didi's main competitor Uber in its series B financing. Two weeks ago, Didi announced a $1 billion investment from Apple. Currently, Didi is the leader in the Chinese market, followed by Uber with a market share around 33%.
The first five months of 2016 saw growth in the Chinese housing market. Data from National Bureau of Statistics shows that investment in new real estate projects increased by 7% while the sale of real estate surged 53.4%. Analysts predict that the trend will continue, despite the fact that the Chinese overall economy in slowing down.
From the beginning of June 2016, at least two listed major Chinese companies reported that their majority shareholders had reduced their stake by more than 10%, signaling possible pressure for the A-share market. Shanxi Yongdong Chemistry Industry for example saw 12.16% reduction from its majority shareholder. During the A-share crisis last year, the CSRC had forbidden majority shareholders’ from reducing their A-share company stakes from June 2015 to January 2016. In the first three months of 2016, the total value of shares cut by majority shareholders grew from 9.6 billion RMB in January 2016 to 14.2 billion RMB in March 2016.
It is expected that real estate developers will face more difficult times in raising funds from both private and public markets. A few days ago, an application for private equity issuance by a sizeable property developer (Shanghai-based Greenland Holding Group) was rejected by the CSRC. It is likely that regulators are trying to cool down the housing market by making fund raising activities more difficult for these developers.
Most emerging markets have seen an uptrend this year - but China has been an exception. 31 ETFs tracking Chinese indices have recorded a negative return of 17% from the beginning of the year 2016 while in the same period, the MSCI Emerging Markets Index has risen by 5.3%. The Shanghai Composite Index, which also dropped by 17% since the beginning for the year, was the index that most underperformed among 93 main indexes used for valuation in the world. In addtion, Renminbi witnessed its largest depreciation this month since last August.
It is believed that the huge increase in Chinese imports from Hong Kong in May is a reflection of continuous outflows of speculative capital, disguised as legitimate trade under the current account. According to China customs, imports in May on a whole reduced by 0.4% in US dollar terms while imports from Hong Kong rose dramatically by 243%. Analysts have long asserted that over-invoicing plays a role in moving capital outside of China and Chinese media, too, considers the channel. Meanwhile, Hong Kong and Chinese authorities have begun to monitor this activity more closely to crack down on illegal capital outflow.
China's regulators are discussing modifications of M&A rules to cool down the recent trend of reverse takeovers. Chinese companies are attempting to have their transactions not labeled as reverse takeovers by intentionally not fulfilling the definition of a reverse takeover. It is possible that the definition of a reverse takeover will be broadened and the ratio of revenue from primary business over total revenue will be taken into consideration, the media mentions. An analyst from a Chinese investment bank does not expect the new regulations to come out soon since the modification is significant.
China customs announced the export and import data in May. Export rose by 1.2% from last year while import increased by 5.1%. It is the third consecutive month seeing export growth, showing a slowly recovering global demand from the reccession. However, in an article on the estimation of Chinese economy in 2016 issued by PBOC in its official website, expected export growth turns negative to -1%, along with an expected GDP growth at 6.8%.
It's likely that PBOC will allow RMB to depreciate or appreciate against a basket of currencies in a medium term, according to an analyst from PBOC. Transparency of the model of RMB exchange rate to a basket of currencies makes it possible to move in either directions. While it is not a good idea for China to track only one currency or only a basket of currency, as it may create obstacles to China's independent monetary policy. In the forseeing future, the openess of interbank bond market to the foreign investors can somehow introduce more capital inflow, thereby hedging the potential depreciation of RMB.
Far East Leasing has come out with a first trust-type ABN (asset-backed note) in China backed by China Development Bank, with a credit rating of AAA. It is also the first time to introduce a SPT(special purpose trust) in the transaction as an innovative way to deversify the risks in China. According to representative of CDB, the introduction of this trust-type ABN can broaden the financing tools and improve the debt structure, and deleverage the real economy.
According to a country treasurer for a large MNC based in Shanghai, window guidance by the People's Bank of China to banks in the country continues to affect corporates. Cross-border trade now requires the more thorough checking of documents such as bills of lading by corporates, the PBOC communicated to bank representatives recently. However, the treasurer continues, only 20 of the largest domestic and foreign banks are invited to the closed door meetings and the central bank requests are communicated only orally, in form of principles rather than clear guidelines. "Banks' interpretations of the PBOC's requests therefore differs," the source says, "and some smaller banks [that are not invited to the meetings] will simply ignore the window guidance, arguing they do not apply to them." Regulation of cross-border cash flows in the current account has been "chaotic" since the beginning of the year, the treasurer says. Two other sources confirm that restrictions on cross-border cash pooling remain in force, i.e. corporates cannot operate pools with a net deficit position in China. No communication on when the restriction will be lifted has been dissiminated to the market.
Chinese media expressed its concerns in Suning's deal, since Inter Milan experienced terrible years in terms of the performance of the football club as well as the financial performance of the club. Inter has not been in Champions League for five years and its profit has been dropping for three years. While Zhang Jindong, CEO of Suning was confident in the future development of Inter Milan on the back of large fan base in China.
Goldman Sachs states in its report that China in fact has a larger amount of aggregate financing than its figures officially report and that the divergence is getting larger. The reason behind this is the rapid development in China's shadow banking industry, which injects liquidity and higher risk into the whole financial system. While it offers little benefit to Chinese economy, as only a small portion of the loans flow into the real economy.
To boost the development of CD(certificate of deposit) business and to offer another investment tool for retail investors, PBOC annouced that the minimum size of CD investment decreased from 300 thousand RMB to 200 thousand RMB from today.While it is still questionable whether this change can attract a lot more customers, analysts state. Low yield, low liquidity and high threshold are main obstacles in developing CD business for Chinese banks.
President Xi Jinping expressed hopes in deeper collaboration with US with a focus in RMB exchange rate, over capacity and bilateral investment treaty, in U.S–China Strategic and Economic Dialogue. In order to boost the collaboration, Chinese and US regulators should work closely in devising policies in macro economy, Xi emphasizes. According to stcn.com, it is likely that China and US will make an progress in bilateral investment treaty soon.
BOCHK was admitted to RMB CIPS(Cross-Border Inter-Bank Payment System) and becomes the first offshore bank directly participating in this system, signaling a further step in boosting RMB internationalization. CIPS was introduced last October on back of increasing demand for RMB cross-border settlement. Eligible onshore participants include ICBC, HSBC and etc.
Despite RMB depretiation in May, analysts from CICC, CMS, Huabao Trust still believe that drop in FX reserve cannot be significant. The reason is that PBOC did not intervene a lot in the RMB exchange rate in May, analysts observed. While the expectation of RMB depreciation still persists, in consideration of potential US rate hike.
Due to a boom in A-share market last year, China's social security fund reports a 229 billion RMB gain, or 15% rate of return last year, the largest yield since 2010, according to National Council for Social Security Fund. The performance of the fund is largely linked with China's stock market. In bullish year of 2007, the return rate was historical high at 43.19% while in a bearish year of 2008 which witnessed the financial crisis, the return rate was only -6.79%. As of the end of 2015, the annual rate of return of social security fund is 8.82%, larger than inflation rate of 6.47%, the media estimates.
Standard Chartered's Barnaby Nelson, head of investors and intermediaries for North East Asia and Greater China, expects "enormous take-up" of the new CIBM Direct scheme among institutional investors globally. The reform, giving virtually all medium and long term investors access to China's onshore bond market without the need to apply for a quota, was first announced in February but drew more than 100 questions from market participants within just three days, Nelson relates. Having clarified the catalogue of questions last Friday, the PBoC has effectively addressed all major outstanding concerns. Most clients interested in the program are large asset managers that already hold QFII and/or RQFII quotas, Nelson also said.
Regulations on index futures and applicable to institutional investors will be relaxed in a gradual manner, the China Financial Futures Exchange (CFFE) said without specifying an effective date. First, margin requirements are to be lowered and restrictions on trading volume will be abolished. During the A-share slump last summer, the CFFE had imposed obstacles in index futures trades to crack down on overspeculation.
China's Caixin Service PMI was 51.2 in May, the weakest reading since February. Although the indicator continues to signal expansion, observers worry that the growth slowdown in China is spreading to the "New China": sectors related to consumption and service industries. Others highlight that real estate is still performing strongly and other sectors simply had a very good beginning of the year.
NAFMII (National Association of Financial Market Institutional Investors) has approved the introduction of credit default swaps (CDS) and credit-linked notes (CLN) to deal with rising default risk. It is hoped that derivatives like CDS and CLN can help diversify credit risk, transfer risks stemming from bad assets from the banking system to capital markets and thus inject liquidity into the banking system.
China Index Academy disclosed that in May, average housing prices across the country increased by 1.7%. The top ten cities by price increase are all second tier cities. If the trend continues, the research firm estimates an annual rate of price increase of 30% to 40% for second tier cities on average.
PBOC, CBRC, CSRC and CIRC ― China's main financial authorities ― have moved to tighten regulations to contain leverage across the economy over the past 12 months, Chinese financial media observes. The PBOC indicated a slowdown in monetary easing while the CBRC prohibited the transfer of bad assets to retail investors by securitization. Meanwhile, the CSRC raised the criteria for allowing reverse takeovers to be similar to an IPO and the CIRC has stepped up regulation of insurance companies' investment process and risk management.
Reviewing CSRC chairman Liu Shiyu's strategy with respect to the regulation of China's stock market, it is obvious that his agency pursues illegal activities more closely in the public. Since Liu took over leadership in February this year, the CSRC has held 14 press conferences and announced punishments for infractions of securities law every time. Since the Liu commenced leadership, 61 companies have been punished for illegal activities.
Following reports in March this year that suggested China's pension funds will be able to invest in equities, several news sources now state August as the effective date of this liberalisation. The total amount managed by the funds is estimated at around 2 trillion RMB, of which up to 30% (600 billion RMB) could flow into the Chinese equity market. Some observers forecast a boom for the A-shares market as a result.
Going public in China is getting more difficult. It is estimated that the implicit requirement of the annual net profit for IPO candidates will be 30 million RMB for thoses on the ChiNext board in Shenzhen and 50 million RMB in the Main & SME Main boards of both Shanghai and Shenzhen exchanges. Corporates not meeting the requirements will be unlikely to get approval for an IPO.
China's official PMI was 50.1 in May, the third consecutive month in which it has been larger than 50 and thus indicating stable expansion of China's economy. Robust demand in the property market is considered as the primary reason for the strong reading.