China Securities Regulatory Commission has said at the Financial Work Meeting that it will speed up improving the infrastructure of China's capital markets, especially for direct financing. Currently, compared to bank loans, the volume of direct financing is still small. The Chinese media estimate that in the first half of 2017 A-share listed companies raised 1.3 trillion yuan through direct financing.
657 companies listed in ChiNext of the Shenzhen Stock Exchange have released their semi-annual profit results. According to Chinese media, the profit growth in H1 2017 slowed significantly compared to 2016 because there have been fewer M&As. The total volume of M&A activities by ChiNext companies grew from 40.4 billion yuan to 214.5 billion yuan from 2013 to 2015. It is expected that M&A activities will continue to slow down in the H2 2017 due to tighter supervision.
Since 2017 there have been more than 10 changes in senior executives at Chinese trust companies, from restructuring of duties, dismissal due to violations, and appointment by other companies. As China is striving to deleverage the financial markets and clamp down the shadow banking sector, trust companies are suffering as they constitute a large part of the shadow banking sector. As of the end of 2016, assets under management of Chinese trust companies amounted to 20.22 trillion yuan.
SOEs have started to speed up the deleveraging process as well as their debt-to-equity swap programmes, according to Chinese media. Currently, 12 central SOEs have signed debt-to-equity agreements with their counterparties, which includes banks and corporates.
High debt has long been a problem for China's SOEs. Since last October China has issued several notices to address the high levels of debt in China's non-financial institutions.
Although China Telecom has denied the participation of Baidu, Alibaba, Tencent and JD.com (BATJ) in their mixed ownership reforms, many Chinese media pundits still believe they will be included in the future. The big four Chinese technology companies have already started cooperating with China Unicom in mobile phone sim cards.
Sources told the Chinese media that the big four technology companies will make equity investments in China Unicom of a total value of up to US$11.8 billion.
Data from Wind show that among 24 steel companies listed in the A-share market, 21 of them recorded higher-than-expected profits. It is believed that the financial performance of the steel companies is attributed to the increasing price of steel. Market analysts believe that with China's continuous efforts to cut overcapacity, high steel prices will still be sustainable.
China Insurance Regulatory Commission (CIRC) has issued temporary regulations for credit insurance products. The regulations forbid certain activities, including selling insurance products where the underlying assets are privately sold bonds or public sold bonds rated below AA+. The regulations also forbid insurance companies from providing guarantees for unqualified P2P companies. For further details (in Chinese), please see: www.circ.gov.cn/web/site0/tab5168/info4076391.htm
The State Council has issued a circular on AI development, which demonstrates China's determination to develop its AI (Artificial Intelligence) capability. The circular requires that by 2030, China's AI technology capability has to be one of the top in the world and that core AI products should exceed one trillion yuan in total value. Since 2016, Chinese technology companies such as Baidu and Alibaba, have begun implementing AI labs.
Since April, when the People's Bank of China (PBoC) required third-party payment companies to deposit reserves, it has accumulated 84.1 billion yuan in reserves from third-party payment companies. Chinese media estimate that third-party payment companies will lose 300 million yuan in profit due to the large reserve requirements. Alibaba and Tencent, the two largest payment platform owners, will lose 40 million yuan and 29 million yuan, respectively, according to estimations in the Chinese media.
In a press conference held by the State Administration of Foreign Exchange (SAFE), Yingchun Wang, spokesperson for SAFE, echoed a recent statement from the National Development and Reform Commission and the Ministry of Commerce. SAFE will collaborate with other authorities to monitor 'unreasonable' outbound activities while still encouraging 'reasonable' M&As. Wang also said that China will continue to open its financial markets and push friendlier policies for overseas businesses in the future.
According to Chinese media, central SOEs (SOEs owned by the Central State Owned Assets Supervision and Administration Commission) will be divided into three types – industrial groups, investment companies and operational companies.
The operational companies will adopt a Temasek model (a fund management model developed by Singapore’s sovereign wealth fund) to maintain the assets of the companies, while the investment companies will be responsible for exploring new industries. The industrial groups will consolidate within strategically critical industries such as power and gas. The number of central SOEs will be reduced from 101 to less than 90.
The Ministry of Housing and Urban-Rural Development and other eight authorities jointly issued a circular on the rental apartment market. The circular requires 12 cities with large population inflows, including Guangzhou, Shenzhen and Nanjing, to develop the rental apartment market on a pilot basis. The circular encourages those cities to construct new apartments for rental use. In addition, banking institutions are required to provide financial support for the construction of rental apartments.
In a press conference of the National Development and Reform Commission (NDRC), Pengcheng Yan, a spokesperson for NDRC stated that it will continue to keep an eye on unreasonable outbound investment in real estate, hotels, movie cinemas, entertainment and football clubs. According to Yan, NDRC supports corporates with real expansion needs to do outbound acquisitions. It particularly supports projects under the Belt Road initiative. NDRC said it will keep an eye on non-manufacturing outbound M&As.
The Guangzhou government has issued new regulations for the city's housing market. The regulations state that the renters of an apartment will enjoy the same ownership benefits as the apartment owner. The children of renters will have the same right to go to nearby schools. Guangzhou becomes the first city in China to implement this reform. Chinese analysts believe that once more cities start to follow Guangzhou, the housing price will significantly drop while the house renting market will benefit greatly.
China's technology leader, Tencent, further expanded its footprint in financial market. Taiwan's Fubon Financial Holding Group announced on July 19 that it will partner with Tencent in selling their insurance products. A joint venture of the two groups will be set up in Shenzhen while a business licence is pending at the Chinese regulators. In 2013, Alibaba, Tencent and Ping'An Group jointly set up an internet insurance company, the first insuretech company in China.
In the financial work meeting last week, a new regulatory committee was set up under the state council. The new regulatory committee is called the Financial Stability Committee. As the name suggests, the committee will be responsible for the stability of China's financial markets and for improving the regulatory environment.
Chinese analysts believe that senior officials from People's Bank of China, China Securities Regulatory Commission, China Banking Regulatory Commission, China Insurance Regulatory Commission and Ministry of Finance will sit on the new committee. It is also believed by analysts that the new committee may be equally as important as the five existing regulatory bodies.
China's A-share market has been criticized for attracting a lot of companies but lacking a good house-cleaning system. Data from Wind show that since 2001 only 60 companies have been delisted from the A-share market. Shenzhen Century Plaza Hotel was the first and only stock delisted from A-share market in 2017. So few companies are delisted because unprofitable companies are still attractive as backdoor listing targets.
Amid a difficult banking environment, a Chinese bank called WeBank stood out in 2016 with a ten-fold growth in revenue. WeBank is an internet bank registered at the China Banking Regulatory Commission and backed by Tencent. The bank has no physical branch. Eighty percent of the bank’s revenue comes from online micro and small loans. Its main internet banking competitor, MyBank, set up by Alibaba, has a larger asset base and more outstanding loans.
China's trade activities have picked up in the first half of 2017. According to Songping Huang, spokesperson of General Administration of Customs, in H1 2017 China exported 7.21 trillion yuan worth of goods, up 15% from H1 2016, while imports totalled 5.93 trillion yuan, up 25.7% from the same period last year. Huang said that trade activities will continue to grow in the second half, despite some uncertainty in international trade.
Over the past few years, Yuebao has been the only money fund sold on Ant Financial's platform. Now the big four banks in China are all allowed to sell their own money market funds in Ant Financial, with an average annual return of 4.5%-4.9%, slightly higher than Yuebao. It is expected that the big four banks will challenge the leading position of Yuebao in the money market.
On Wednesday, July 12, Jiang Yang, vice chairman of the China Securities Regulatory Commission (CSRC) said that China will strengthen its supervision on the securities market as it aims to keep it fair, open, and impartial. Reforms will improve the capital market, making it more open to foreign investors to better serve the economy. “Chinese regulators will continue cracking down on violations of securities laws and regulations, including insider trading and market manipulation,” said Jiang.
Since the Bond Connect was launched, offshore investors have shown great interest in onshore bonds. New bonds issued by Agricultural Development Bank of China received ten times oversubscription while a number of other larger issuers also received at least two times oversubscription. The growing interest, as Chinese media explained, is attributed to the rising yields of renminbi bonds, which is in line with the increase in global yields.
Chinese state media under the People's Bank of China published an article on China's renminbi reform. The article expected that the future direction of the renminbi reform will be to widen the floating range of the currency, while at the same time the currency will remain at a relatively stable level. The article also said that the government should try their best to reduce their intervention in the FX market.
Chinese property developers have difficulties in getting financing in the onshore market. According to Chinese media, Sunac China Holdings Limited's 10-billion-yuan enterprise bonds were rejected by the Shanghai Stock Exchange. As of July 6, 13 property developers have been rejected by the China Securities Regulatory Commission. Some Chinese property developers turn to trust companies for financing, although the cost of financing is higher than bank loans and bonds.
China's Bay Area Economic Plan, focusing on the development of Guangdong, Hong Kong and Macau, has been submitted to the National Development and Reform Commission. The new Bay Area is expected to compete with Bay Areas in New York, San Francisco and Tokyo. According to government officials, the construction of the Bay Area is expected to be completed by 2020. By 2030, officials estimate that China’s Bay Area will become the most productive Bay Area in the world.
Since the National Internet Finance Association was launched, 24 P2P companies have joined the association as of July 10. Due to tighter regulation of China's P2P companies, the quality of existing companies has improved. Seventy percent of the 24 member companies have reported profits in 2016, while Hongling Capital and Dianrong, two leading P2P member companies, have recorded losses of 183 million yuan and 179 million yuan, respectively.
According to Chinese media, the China Banking Regulatory Commission has issued 744 disciplinary fine letters to commercial banks and asset management companies. Sources told Chinese media that regulators do not accept any type appeal process in relation to fines: once the letter is issued, those companies will have to pay the bill. Among all violations, misconduct in credit businesses are the most common.
China Securities Regulatory Commission (CSRC) issued amended regulations for Chinese securities companies on July 7. The new regulations update and address some issues that could add or deduct marks to the securities companies in terms of ratings. CSRC releases the annual review in mid-July every year. In 2016, over 60% of securities companies were downgraded by CSRC.
After years of expansion, Chinese commercial banks are now in a stage of restructuring. In the first half of 2017, Beijing saw 38 local branches shut by banks such as Bohai Bank, Shanghai Pudong Development Bank and Everbright Bank. According to Chinese analysts, these local branches do not adopt a sophisticated business model and are not profitable.
As China continues to tighten regulations, CSRC has intensively cracked-down on violations such as insider trading over the past few years. Since 2014, CSRC has initiated 99 insider trading investigations and submitted 83 cases to police, in relation to sums amounting to 80 billion yuan. As of May 2017, 25 asset managers received criminal convictions and 15 employees of securities companies were disqualified from the market.
China's mutual fund industry reached a milestone in the first half of 2017 when market size exceeded 10 trillion yuan. Money market funds now total 5.12 trillion yuan and account for half of the mutual fund market. Currently, Tianhong Asset Management, ICBC Credit Suisse and Efunds are the top three asset management companies in China in terms of AUM. Noticeably, Bank of China Investment Management has fallen out of the top ten.
Sources confirmed to Chinese media that the financial work meeting, held every five years, will commence in mid-July. The financial work meeting discusses possible significant reforms in the financial market. The market believes that the meeting this year will mainly focus on financial risk and regulatory frameworks. The much-discussed consolidation of PBoC, CSRC, CBRC and CIRC, is not likely to happen soon. Chinese analysts believe that the main obstacle to the consolidation is from the objection from current government officials whose responsibilities and power will be affected.
On Thursday, July 6, Liu Qibao, a member of the Political Bureau of the CPC Central Committee, called for the integration of culture in economic development. Liu urged China to seek deeper international cultural exchanges, showcasing Chinese culture as part of the Belt and Road initiative. According to Liu, cultural development is crucial to economic development and poverty alleviation.
According to an official statement on Wednesday, July 5, the Chinese government aims to ensure that both domestic and foreign companies registered in China have equal legal footing. Regulations and policies will be improved to further stimulate market vitality, and high-quality assets will be used to attract investments through public-private partnerships in order to create a fair legal environment. These improvements will make China more desirable for foreign investors.
Along with the shift in the Chinese market from a producer model to household consumption, the country’s outbound investments are also experiencing a shift from energy and commodities to brands and technology.
In 2014, China’s outbound merger and acquisition (M&A) activity in technology-related sectors, including relating to the internet and software, amounted to the same as traditional energy investments. In 2016, China’s outbound M&A in internet and software reached US$26.7 billion, while outbound M&A in energy dropped to just US$2.8 billion from US$30 billion in 2012.
China Securities Regulatory Commission (CSRC) has sped-up processing time for M&A activities for A-share companies. According to Chinese media, 24 M&A applications were approved in June, the most in 2017. This compares to 9 in January, 5 in February, 13 in March, 11 in April, and 10 in May. In a bid to crack-down on violations in M&A activities, CSRC issued new regulation for M&A activities last September.
As China begins to deleverage the financial market, Chinese banks have started to redeem their investment in funds of asset management companies. Specifically, ICBC-Credit Suisse has seen over 10 billion units of redemption in their two mutual funds from banks in the second quarter. According to a banker working at a Chinese bank, the main reason for the large redemption is that banks have to fulfill the liquidity requirement of PBoC. The other reason is that the domestic bond market performed poorly in the first half of 2017 and banks need to find other investment opportunities with higher return.
As China’s population continues to age there is a growing need for accelerating the development of commercial pension insurance. The Chinese State Council recently released a guideline to speed up the development of commercial pension insurance. It will not only become the largest source of increment in the insurance market, but will also form a strong foundation for stabilizing the domestic capital market.
Chinese President Xi Jinping encourages the development of an open world economy. Xi said the world economy still faces daunting challenges despite “further consolidation of growth momentum… in both developed and emerging economies,” as such, he noted that “the G20 needs to stay committed to open development, support the multilateral trading regime with the WTO at its heart, and enable trade and investment to continue to drive global economic growth.”
People's Bank of China issued a regulation on rating agencies in China’s Interbank Bond Market. The regulation requires that foreign rating agencies have to register at the PBoC provincial branch. Moreover, foreign rating agencies have to comply with PBoC regulations and be monitored by the PBoC. The regulation also sets up qualification requirement and specifies a list of violations. For the whole regulation, please go to (in Chinese):
Textile is one of the most important industries in China, accounting for 5% of all 30 sectors in the manufacturing industry. In the face of large volatility of the cotton yarn price, China Securities Regulatory Commission (CSRC) recently approved cotton yarn future trading in Zhengzhou’s Commodity Exchange. According to the CSRC, the cotton yarn future can help manufacturers hedge their exposure and help with price discovery. The official launch time will be announced soon.
China's SOE reform has entered the final stretch. In a recent meeting of the Chinese State Council, a deadline was proposed that SOE reform has to be mostly completed by the end of this year. According to Chinese media, 92% of central SOEs have started their reform while the number of provincial SOEs is 90%. Apart from the ownership structure, other key areas of the reform will tackle corporate structure and board of directors appointees.
The Ministry of Commerce of the People's Republic of China recently released a report on the development of retail industry (2016/2017). According to the report, by the end of 2016, there are 1.81 million of retailing units in China, this represents an increase by 5.2% compared to 2016.
According to Tencent, its superstar mobile phone game, King of Glory, has achieved a revenue of 6 billion yuan during the first quarter of 2017, with a monthly turnover of 3 billion yuan. The revenue of this unprecedentedly successful game was even higher than 3079 A-share listed companies. The game has over 200 million registered users and 50 million daily active users. Around 120 million users are still in primary school.
As of the end of June, Yuebao, China's largest money market fund sold on Ant Financial’s platform, has reached a size of 1.43 trillion yuan. The fund exceeded the size of personal deposits of China Merchants Bank, only slightly behind Bank of China. Yuebao is also the world largest money market fund. As of the end of 2017Q1, the fund has reached a market share of 12%.
China Insurance Regulatory Commission issued a regulation on China's insurance companies. The regulation allows insurance companies to participate in the Shenzhen-Hong Kong Stock Connect. The regulation also specifies the requirement of eligible companies and investable stocks. Chinese insurance companies could invest in Hong Kong stocks only through the QDII program, third party agencies or their offshore investment subsidiaries.
Trial operation of Northbound Trading on the Bond Connect commenced today. Agricultural Development Bank of China and China Development Bank will issue policies on bonds to foreign and domestic investors for the first time on 3 July and 4 July respectively. According to a Chinese Economist, Bond Connect is a new milestone for the opening up of China’s capital market to foreign countries. Deutsche Bank predicts that US$700 to US$800 billion of foreign capital will flow into onshore renminbi bond market in the next five years.
According to Chinese media, Citi will include China into its World Government Bond Index – Extended / WGBI-Extended from July. At the same time, Citi also announced to launch two bond index, Citi Chinese (Onshore CNY) Broad Bond Index and The Citi Chinese (Onshore CNY) Broad Bond Index - Interbank). The new indexes will enrich the coverage of Citi's bond index portfolio.
Chinese media learned from the State-owned Asset Supervision and Administration Commission that another M&A between two central SOEs has been completed. China High-Tech Group Corporation was acquired by China National Machinery Industry Corporation, a state-owned manufacturing group. As a result, the number of central SOEs decreased to 101.
China’s Hushen 300 index futures opened lower on Friday, June 30, with the contract for settlement in July down 0.37% to finish at 3,632 points. Similarly in August, September, and December contracts opened lower at 0.03%, 0.35%, and 0.43% respectively. The China Financial Futures Exchange (CFFEX) has set the base value for all the four contracts at 3,399 points.
According to the National Bureau of Statistics on Friday, June 30, China’s manufacturing sector has expanded for eleven straight months stretching back to May 2016. China’s purchasing managers’ index (PMI) came in with a reading of 51.7% recorded for June. A reading over 50% indicates expansion, while a reading below indicates contraction.
Foreign investors have high hopes for bond connect, a trading link for bonds between mainland China and Hong Kong. This program has the chance to increase overseas ownership of bonds in China where it is currently less than 2%. On Thursday, June 29 , Li Xiaojia, chief executive of Hong Kong Exchanges & Clearing (HKEx) remarked that bond connect is “technically ready” at the moment. James O’Sullvian, the head of securities services at Standard Chartered Bank in Hong Kong noted that the trading mechanism, known for its simplified application process and automated trading will satisfy international investors.
Guoqiang Ma, the chairman of China Baowu Steel Group Corporation, said in a forum that people generally have a misunderstanding of SOEs. According to Ma, from historical statistics, most technological innovations were introduced by SOEs. But Ma also committed that in terms of business models, POEs are more innovative and flexible than SOEs.
According to Chinese media, during the first half of 2017, the China Securities Regulatory Commission approved 224 IPOs with a pass rate of 84.8%. Thirty-seven companies have been rejected by CSRC. The rejection rate of NEEQ (National Equities Exchange and Quotations) is much higher than the overall rate. The tightened supervision by CSRC is regarded as the main reason for the higher rejection rate.
At the World Economic Forum in Dalian on Wednesday, June 28th, Premier Li Keqiang promised foreign companies easier market access and a level playing field. The country plans to enact reforms to allow greater participation of foreign capital and companies. Li said, “China’s reform has always run parallel with opening up. We invite foreign firms to come to China and participate in corporate reorganization to foster new growth engines.”
The first round of regulations aimed at protecting investors in the securities and futures market will be put into force on 1 July. The new regulation has positive and far reaching impact on development on China’s capital market. It also protects the right and interests of medium and small investors. The selling of products and services to new clients and higher risk products to old clients by securities and futures intermediates are now regulated. Under new regulations, investors of low risk tolerance can also invest in high-risk products after a confirmation process.
Since MSCI included Chinese A-shares into its emerging market index, the trading volume of CSOP FTSE China A50 ETF, the largest A-share ETF, has increased significantly. On June 27, the fund gained 1.5 billion yuan in subscriptions from long-only investors and some speculative investors. It is the first time where a large volume of international funds have entered into the A-share market since the MSCI inclusion.
Chinese premier Li Keqiang said in a recent speech that China encourages foreign companies to keep their profits in China and invest in China. On the other hand, Li said that foreign companies, if their profits are generated in China, can also freely remit them out without any restriction. Some sources have confirmed to Chinese media that cross border flows have started to become easier on the back of the country’s rising FX reserve.
China’s major industrial firms registered double-digit profit growth in May 2017, reporting 2.9 trillion yuan in profits, a 22.7% increase from the previous year. This profit growth came despite moderated prices of industrial goods. This has led researchers from China Merchants Securities to believe that the “tightened financial regulation will have limited impact on the real economy”. In the 2017 Summer Davos Summit, Premier Li Keqiang said that with the steady economic transition, China is capable of delivering the year’s major growth targets.
People's Bank of China announced on June 26 that it did not extend third party payment licenses to 9 companies. Currently, licenses from 20 third party payment companies have been revoked 2017. Chinese analysts believe that as the payment market becomes larger in China, Mainland financial regulators are redoubling their efforts in monitoring the market. Extension of third party payment licenses are also increasingly becoming difficult for companies.
According to Chinese media, banks and exchanges are ready for the Bond Connect system with reports stating that the scheme can be launched as early as July 3rd. The market expects favorable policies towards Hong Kong as Chinese President Xi Jinping visits territory on June 29.
China Central Depository & Clearing Co (CCDC) released a custodian regulation in addition to PBoC's regulation last week. The additional regulation specifies the roles and responsibilities of CCDC and Central Moneymarkets Unit (CMU).
For the whole regulation (in Chinese), please visit:
The National Audit Office released an auditing report of 20 central SOEs focusing on their activities over the past several years. The report pointed out that 18 central SOEs have exaggerated their profits by 200 billion yuan through the adjustment of their balance sheet. One of the most common violations is undisciplined procurement and sales. Five central SOEs are involved in manipulating their procurement and sales figures.
Henry Fernandez, CEO of MSCI told Chinese media that the MSCI has pitched to over 150 investment entities including pension funds, asset managers and other investment agencies. According to Henry, overseas investors recognized that the two stock connect schemes were more helpful than the QFII/RQFII programmes. On the other hand, overseas investors share concerns around the suspension of stocks and the current investment quota. Fernandez also said that MSCI is considering including an additional 195 mid-cap A-shares to its index in the future.
Investment in local provinces will likely speed up in 2017. Since the second quarter of 2017, a couple of provinces including Inner Mongolia, Guizhou and Sichuan have announced their investment plans in Q2 2017. Unlike previous years, the investment is mainly in new economy projects instead of infrastructure projects. Data from the National Bureau of Statistics also shows that for the first five months of the year, the investment growth in high tech sector is faster than other sectors.
On June 23, Zhang Shaochun, vice minister of finance, announced on his State Council report to the Standing Committee of the National People’s Congress (NPC) that China’s government debt risk is “largely controllable”. According to official data, in 2016, the combined debt of China was 27.3 trillion yuan, with a debt-to-GDP ratio at 36.7%. The central government has continued to hold its officials accountable for illegal financing activities, and “Fresh steps have been taken to better manage China’s local government debt, with strengthened supervision efforts… and risk prevention schemes,” Zhang said.
The bike sharing industry in China is reaching an infection point. Following the first bankruptcy in the bike sharing industry a first M&A is likely to be completed soon. According to Chinese media, the industry leader Mobike will complete its acquisition of UniBike in a few days. After the completion, Mobike will continue to focus on higher tier cities while UniBike will stay in the lower tier cities.
Xinghai Fang, vice chairman of China Securities Regulatory Commission recently said that the CSRC will speed up the opening of government bond futures market to commercial banks. A source told the Chinese media that new regulations will come out as early as this year. According to Chinese analysts, the futures market will significantly affect the pricing in the spot market and can also offer a hedging option to the participants.
Data from the Ministry of Human Resource and Social Security shows that for the first five months, the pension fund has seen an inflow of 1.57 trillion yuan and an outflow of 1.35 trillion yuan. Despite a net inflow in the pension fund balance, there is an imbalance among different provinces. According to the Ministry of Human Resource and Social Security, the balance in eastern provinces is much larger than western provinces. In northeast China, there is even a deficit in the pension fund account.
On Wednesday, the Chinese State Council declared its support for the development of the sharing economy. China will aid by improving tax and welfare policies and providing support for those self-employed in the sharing economy. Premier Li Keqiang announced that China is adapting to the latest technology to facilitate supply-side structural reform, which will reduce overcapacity and lower costs to generate sustainable long-term growth. Li also said that there would be no WeChat if the government interrupted the development of the technological innovation in the past.
As technology grows in importance, Chinese commercial banks have started to partner with leading technology companies. Currently, Huaxia Bank has partnered with Tencent, while ICBC has partnered with JD.com. ABC signed a partnership agreement with Baidu, and CCB partnered with Ant Financial.
The competitive landscape of China's financial industry has become more complicated as technology companies obtain financial licenses while at the same time collaborating with traditional financial players.
Baidu, Alibaba and Tencent have started to shake old labels by putting forward their new strategic positions. Instead of position itself as an e-commerce company, Alibaba emphasized that it is an infrastructure provider that empowers e-commerce companies. Tencent says internally that it is a technology company rather than a social media or entertainment company. Tencent has been investing a lot in AI technology, and Baidu says that it will become an AI company instead of a technology company. It becomes clear that Chinese technology leaders are upgrading themselves by heading towards high-end technology services.
A study from Chinese Enterprise-employee Matching Research shows that the average net profit margin of Chinese enterprises is 3.3% on average. The average net profit margin of POEs is 3.9%, higher than the number of SOEs (2.2%) and foreign owned enterprises (2.1%). Enterprise mangers say that there has been increased adoption of machines or automatic devices to replace human employees to save on labor costs. The study also finds that the numbers of employees in Guangdong and Hubei provinces have dropped, mostly labor intensive positions.
A People’s Bank of China (PBoC) survey reveals that domestic entrepreneur confidence is on the rise. The PBoC’s entrepreneur index rose for the fifth straight quarter despite the tightening of financial supervision from regulators. The index rose from 61.5 to 65.4 compared to the previous quarter. Similarly, bankers’ confidence in the Chinese economy increased from 64.9 to 67.8 from the first quarter of 2017.
Driven by innovation and transition of the cities, China's "Bay Area" consisting of Guangdong, Hong Kong and Macau, is expected to compete with New York’s Bay Area, San Francisco’s Bay Area and Tokyo’s Bay Area. A source told Chinese media that China's Bay Area will focus on internet, cloud computation and AI and the potential market size will grow to trillions of yuan. Pony Ma, chairman and CEO of Tencent, believes that there is large potential in the Bay Area because there are already a number of innovative firms in the area.
During the sixth annual dialogue in Beijing hosted by the US Chamber of Commerce and China Centre for International Economic Exchanges, premier Li Keqiang encouraged US firms to invest in China to advance the development of bilateral ties. Both countries are anticipated to benefit from joint economic and trade cooperation.
The PBoC published an article on their website saying that digital currencies in China are not legal because they are not issued or authorized by the central bank. The government entity also says that only digital currencies issued by PBoC are regarded as legal currencies. In 2013, the central bank defined bitcoins as virtual goods, rather than currency.
The rapid increase of third-party electronic payments is responsible for improving China’s online consumer market. The growth is seen as favourable to the Chinese economy as it supports the country’s economic rebalancing and boosts consumption and employment. Though e-payments are projected to increase, the banking sector is predicted to not be greatly affected as retail business payments make up only a small portion of Chinese banks’ revenue.
China Eastern Airlines recently became the first central SOE to complete its mixed ownership reform. Eastern Air Logistics, originally owned by China Eastern Airlines, has been spun off with 45% shares owned by China Eastern Airlines, 25% owned by Lenovo, 10% owned by Global Logistic Properties, 5% owned by Deppon, 5% owned by Greenland and 10% owned by Eastern Airline's core employees. According to China Eastern Airlines, Lenovo, Global Logistic Properties and Deppon are strategic investors while Greenland is its financial investor. In addition, China Eastern Airlines intentionally chose to give up an absolute control over the Eastern Air Logistics, which has demonstrated the central SOE's determination to push ahead with reform policies.
Xiaochuan Zhou, Governor of People's Bank of China, stated in a speech in Shanghai that The Cross-Border Interbank Payment System (CIPS) will open an operation in Shanghai to better serve Renminbi internationalization and One Belt One Road. According to Zhou, the set up of CIPS in Shanghai will further support the city’s position as an international financial center. Zhou also said that Shanghai has the ambition to become a top international financial hub by 2020.
On June 18th, the world largest coal company Shenhua Group made an official asset restructuring announcement. According to the announcement, the company's stock will be suspended until early July. The market expects that a new conglomerate with around 2 trillion yuan worth of total assets will be formed in early July. The size of the new company will become larger than all previously merged SOEs including Baowu Group, China Minmetals Corporation, CRRC Corporation and China COSCO Shipping Corporation.
While People's Bank of China did not follow Federal Reserve System to raise the interest rate, SHIBOR, the benchmark interest rate in China, has continued to rise. Chinese commercial banks have been competing for capital by issuing interbank deposits. This has effected the three-month AAA rated interbank deposit rate which at one point exceeded 5%. According to Chinese traders, the rate hike from the Fed has worsened the market liquidity in the interbank market.
Yaqing Xiao, head of the State-owned Asset Supervision Administration Commission, stated in a speech that the main objective of the SOE reform was to strengthen the competitiveness of SOEs. Xiao believes that privatizing or getting rid of state ownership from the SOEs is completely incorrect. According to Xiao, central SOEs have achieved a profit of 312 billion yuan in 2017 Q1, 23.2% higher than 2016 Q1, which marked a record high compared to previous years.
According to Ministry of Commerce (MOC), the Foreign Direct Investment (FDI) in May was 54.67 billion yuan, 3.7% down from May 2016. It is the second consecutive month where FDI has shrunk. MOC spokesperson said organization will issue an official guideline on FDIs soon to provide a better business environment and to attract overseas investors.
A guideline on mutual funds investing into Hong Kong stocks through the Stock Connect has been issued to asset managers. The guideline requires mutual funds participating in the Stock Connect with a name tag of "Hong Kong stock" should invest at least 80% of non-cash assets in Hong Kong stocks. Those with less than 80% of non-cash investments in Hong Kong stocks should not include "Hong Kong Stock" in the mutual fund name. Asset managers have been keen on introducing funds investing in Hong Kong stocks as a result of the Stock Connect.
Salespeople of commercial banks have been struggling to make new sales over the past few months. As the liquidity becomes tighter, the interest rate of personal loans and corporate loans have also risen significantly. In addition, banks are also facing a shortage of reserves to lend out to corporates. A relationship manager of a commercial bank in China told Chinese media that a large proportion of relationship managers have seen lower compensation as a result of fewer new loans.
The share price of Meitu has dropped below its IPO price after its six month cornerstone investor lock-up period. According to Chinese media, Meitu's large shareholders planned to sell 66 million shares at its IPO price. Since its IPO, the Chinese technology company has experienced a bouts of stock price fluctuation.
Regulators of the Chinese exchange market are discussing the feasibility of adjusting the credit rating requirement for issuers. In April, China’s Central Depository & Clearing issued a guideline that forbids pledged assets from bonds rated below AAA or from issuers below AA.
The guideline puts pressure on credit rating agencies as issuers have been requesting higher rating. Issuers hope a higher rating will generate liquidity for their bonds. According to Chinese media, regulators of the exchange market are planning to establish a bi-credit rating mechanism where two credit rating agencies will issue two reports of the issuers independently. In addition, the exchange will also build up an internal rating system to review the credentials of issuers.
Industrial Securities announced that it would establish a special fund to compensate the loss for investors involve in Dandong Xintai Electric's fraud IPO. Industrial Securities will claim the loss from Dandong Xintai Electric. According to China’s Securities Regulatory Commission, the pre-reimbursement requirement has been in place for two years. Market experts believe that the pre-reimbursement requirement can reinforce the due diligence of future IPO underwriters and enhance the investor protection mechanism.
Shanghai Free Trade Zone announced that an onshore crude oil client has successfully opened an account in Haitong Futures Shanghai FTZ branch. It is the first client of China's crude oil futures, a move that signals crude oil futures will be officially launched in China soon. For offshore clients, they should still wait for official regulation to be issued by the China Futures Association. Currently, 138 futures companies have obtained qualifications for crude oil futures.
The annual report from the National Council for Social Security Fund shows that in 2016, the Social Security Fund achieved an investment return of 31.94 billion yuan or a rate of return of 1.73%. Since the fund was launched in 2000, it has grown at a CARG of 8.37% and the accumulated investment return as of 2016 was 822.7 billion yuan. Noticeably, overseas asset accounted for 6.66% of the whole portfolio.
In response to recent questions regarding the counter cyclical factor, state owned media reported that the additional factor is not manipulation of the FX market. Instead, the factor can help the FX rate better reflect the fundamentals of China's economy. According to Chinese media, the variables that make up the counter cyclical factor are not determined by the People's Bank of China but commercial banks. Therefore, the state media believes the factor will be a pure market decision.
National Development and Reform Commission (NDRC) and Ministry of Industry and Information Technology jointly issued a guideline that encourages the strategic partnership or consolidation in automobile sector in China. The guideline also encourage companies with strong technology capabilities to enter the new energy vehicle sector. According to NDRC, areas with serious pollution such as Beijing, Tianjin and Hebei, will be encouraged to invest in more new energy vehicles.
Securities Association of China recently issued a drafted guideline on enterprise bond underwriting towards securities companies. The new guideline adds two more requirements to the enterprise bond underwriters. According to Chinese media, eligible underwriters for enterprise bonds should be granted an A rate or above from Chinese regulators within past two years.
Moreover, non-A type securities companies(there are only 36 A-type securities companies) should be ranked top 20 in terms of enterprise bond underwrite volume. Chinese analysts believe the new guideline will benefit large securities companies due to the fact that small securities companies are kept outside of the enterprise bond market.
Ministry of Commerce is speeding up streamlining rules for overseas corporates applying for a business license in China. According to Ministry of Commerce, 6383 overseas invested corporates have been set up in 2017 Q1, 7.2% up from same period in 2016. A few provinces including Fujian, Jiangsu, Zhejiang and Hubei, have already allowed foreign participation in infrastructure PPP projects.
The Chinese State Council announced in last October a review program on fintech companies consisting of finding problematic fintech companies, providing them with advice and estimating the compliance of those companies. The review was supposed to be completed this June. However, according to Chinese media, the review is likely to be postponed to June 2018. Business licenses of companies that fail to comply with the required rules by then will be revoked. Experts believe that only a third of fintech companies can survive when the program is implemented.
As financial innovation continues to accelerate in China, new risks are brought about. In order to counter the new challenge of the financial industry, The People’s Bank of China and four other departments including the China Securities Regulatory Commission, China Banking Regulatory Commission, China Insurance Regulatory Commission and Standardization Administration issued a plan of constructing a standardization system for the industry from. From 2011 to 2015, over 96 regulation and guidelines have been issued. The plan requires that over 110 regulatory updates or new regulation or guidelines should be completed within the next five years. The standardization system will focus on financial product, infrastructure, statistics and risk monitoring/control.
For the first time over the past four years, a one year Chinese government bond has a higher yield to maturity (YTM) than a ten year government bond. On June 8, the one year YTM was 3.66% while the ten year YTM was 3.65%. It reflects a higher liquidity in a longer tenor bond market. In mid-May, the Chinese government bond market even saw a M-shaped yield curve.
Some A-share listed companies have been buying their own stocks to support their share price over the past few weeks, which has caught the attention of Chinese regulators. Shenzhen Stock Exchange has recently issued a regulation on all Shenzhen A-listed companies’ shareholders. The regulation requires that Shenzhen-listed companies should disclose detailed information of stock holding encouragement letter to employees. The regulation also lists some compulsory disclosures.
Charles Li, Chief Executive of HKEX, says that the southbound feature of the Bond Connect will not be launched in the next two years as Hong Kong’s bond market is not sophisticated enough. He also pointed out that at the beginning stages of the Bond Connect there would be some regulatory restrictions that serve as a buffer to Chinese regulators. According to Li, the southbound features of the Bond Connect will be launched depending on market conditions.
In a general meeting of the State Council, Premier Li Keqiang says that the one trillion yuan tax and expense should be cut in 2017. Apart from four tax cut plans amounting to 718 billion yuan put forward earlier this year, a few types of fees will also be waived. Banks and insurance companies will not be subjected to regulatory fees.
The National Finance Association of China is planning to build a monitoring system for online financing platforms due to the amount of platforms operating in the country. According to statistics from p2peye, 56% of P2P platforms in China have encountered problems such as fraud and financial closures. P2peye states that there are around 4950 p2p platforms operating in China. The system hopes to help lower risks and prevent investor losses.
Chinese customers are facing difficulties in getting housing mortgages. According to Chinese media, the mortgage interest rate has risen by 10%, as a result of the central government's efforts to control the housing price in China. Those who already applied mortgage loans will have to wait unless they accept an increase in their interest rates.
The Ministry of Finance issued a new circular on the tax benefits to small and micro enterprises. The circular defines that small and micro enterprises should have an annual revenue of no more than 500 thousand yuan. According to a previous circular, small and micro enterprises were defined to have no more than 300 thousand yuan in annual revenue.
Latest date from the State Administration of Foreign Exchange shows that as of May 26, 283 QFIIs have obtained US$92.7billion in investment quotas, US$1.96 billion more than April. Market participates anticipated that there will be investment opportunities in bluechip A-shares. According to Chinese media, seven A-listed companies such as Angang Steel Company, Midea Group, Zhang Jia Jie Tourism Group and Hefei Meyer Optoelectronic Technology have accommodated field research by overseas institutions in the first four trading days of June.
More Chinese property developers have become a common sight for land bids in Hong Kong indicating heated competition between Chinese and Hong Kong property developers. Over the past year, ten plots of land have been acquired by Chinese property developers worth around HK$60 billion. Chinese analysts believe that the main reason for the strong demand is the growing difficulty of purchasing land in mainland China.
Yang Jiang, vice chairman of China’s Securities Regulatory Commission (CSRC) states in a speech that CSRC is making efforts to streamline the M&A documentation procedure. Jiang says that 90% of the M&A applications of listed companies do not need the CSRC's approval. According to Jiang, in the future, the CSRC will continue to open up the capital markets to overseas financial institutions.
As MPA (Macro Prudential Assessment) is around the corner, banks are actively attracting deposits by offering high yield wealth management products to customers. The average wealth management yield has been increasing for the past few weeks and some wealth management products even offer over 7% yield. The high yield has even attracted institutional clients. For the first five days of June 2017, 67 listed companies have announced their purchase of wealth management products.
On June 4th, the world largest coal company Shenhua Group and GD Power Development, one of the top five power companies in China, jointly made an official restructuring announcement. The market expects that those two companies will merge into a conglomerate with around 1.8 trillion yuan worth of total assets. The size of the new company will become larger than all previously merged SOEs including Baowu Group, China Minmetals Corporation, CRRC Corporation and China COSCO Shipping Corporation.
A credit bond was issued with a yield of 9.3% last week, the third such bond that reported over 9% yield in 2017. Data from Wind shows that for the first five months of 2017, 471 credit bonds were issued with a yield over 6%. As a result of financial regulators' efforts to deleverage the financial market, the average interest rate of issuing a credit bond has become higher than the interbank interest. Chinese banks, therefore, increased the interest rate of deposit and wealth management products to retain deposits from customers.
The People's Bank of China announced the launch of a China-Brazil fund on May 30. The fund will serve to support China’s One-Belt-One-Road initiative and Go-global strategy. The China-Brazil fund is aimed at bolstering the strategic cooperation between China and Brazil.
Ministry of Finance and Ministry of Land and Resources have jointly issued a circular on land project bonds for local governments. The circular allows local governments to issue land bonds where proceeds would be used for land exploration. The land project bonds will be monitored and registered under Ministry of Land and Resources. Chinese analysts believe that the official land financing channel for local governments can release the financing burden of LGFVs.
Since May 25th, the CNH/USD has risen to 1500 bps within the past six trading days. Chinese media summarized seven possible theories for the sudden increase of CNH. Those reasons include US rate hike, Moody's downgrade, price divergence between mid-price and closing price, twisting the Renminbi depreciation trend, comforting the market emotion, releasing the pressure of US government and One Belt One Road initiative.
According to Chinese media, in the first five months of 2017, the China Securities Regulatory Commission (CSRC) have issued 55 penalty notices to listed companies, third-party agencies and retail investors. Reasons include insider trading, market manipulation and short term trading. Among all those being penalized, the largest disciplinary fine was 3.5 billion yuan.
Data from Hithink RoyalFlush information shows that the yield of AAA rated five year MTN has exceeded the interest rate of bank loan for the first time since 2008. Since 2017, 394 bond issuance with a total amount of 369.4 billion yuan have been cancelled. Currently, the yield of AAA rated five year MTN is 6.14% while the number a week ago was 4.72%. The yield for AA rated five year MTN is even higher at 7%. Chinese analysts believe that the tightened liquidity, increasing risk and stricter monitoring are the main reasons why large corporates or SOEs are considering bank loans again.
Following the partnership with Bailian, Alibaba acquired 18% of outstanding shares of Lianhua Supermarket on last Friday. According to Chinese media, Alibaba is developing its S2B model (supply chain to business) where small businesses rely on the company’s supply chain platform. It the recent move shows that Alibaba is attempting to integrate its internet, big data, logistics and payment capabilities
The A-share market has seen significant fluctuation over the past few weeks. Some large shareholders of A-share companies were alerted by stock exchanges to keep an eye on their pledging shares. These shareholders get finance by pledging their shares to financial institutions. Regulators have sent notices to those companies whose positions could be automatically offset due to poor performance of the secondary market.
China Securities Regulatory Commission issued a supplementary regulation on holdings reduction from large shareholders of A-share companies. The new regulation requires that block trade players need to comply with the securities law. The rule also sets a restriction for large shareholders instructs them to reduce their shares that are not from the IPO. The regulation also highlights that convertible bonds and equity swap should be subject to this regulation. For the full regulation, please go to:
China’s Banking Regulatory Commission issued a guideline on banks to encourage inclusive finance, which was introduced by United Nations in 2005. The guideline requires banks, especially state-owned banks, to set up inclusive finance departments to help SMEs companies from rural areas and agricultural companies. Specifically, large banks are required to set up an inclusive finance department by the end of 2017. As of the end of March, outstanding loans to SMEs totaled 27.8 trillion yuan, 14.4% up from the same period last year reveals CBRC data.
Since 2017, three Chinese securities companies including Huatai Securities, Orient Securities and Shenwan Hongyuan Securities have announced their private placements, with a maximum amount of 50 billion yuan. In 2016, total private placement was just 20.6 billion yuan. Chinese analysts explain that the issuers this year are much larger in terms of size than last year’s. However, Chinese analysts believe that it is possible that the private placements may be undersubscribed.
China's money multiplier reached 5.33 in April, the highest since 1997 while the M2 growth has slowed down. Analysts believe that the People’s Bank of China (PBoC) has tightened the money supply. However, the money creating capability of China's financial market especially in the shadow banking sector has gone up. The money multiplier has been considered as a leading economic indicator of an economy. Chinese analysts expect that the (PBoC) will continue to keep the M2 supply tight which will pose a liquidity challenge to banks.
In a bid to crack down on illegal activities such as money laundering and terrorism financing, the PBoC issued a guideline on account openings. The guideline states that financial institutions have the right to refuse account opening applications in certain circumstances. The guideline also specifies actions market participants should take when conducting KYC and AML investigations. The guideline will be applicable to all market participants including banks, asset management companies, insurance companies and other financial institutions.
State Administration of Foreign Exchange (SAFE) disclosed 10 cases of FX violations including both individuals and corporates on its website. Those violations include fake invoices, fraud accounting treatment and transferring the money through different personal accounts. SAFE has been liberating FX regulation on legal cross-border transactions while it has been closely overseeing the FX violations in the market.
China's Ministry of Finance issued a 74 page official report on the China-US relationship. Within the report there are four sections discussing the general principles and possible future opportunities in bilateral relations. The report points out that China will import more agricultural and energy products from US. In addition, China will not allow the renminbi to depreciate.
For the whole report, please go to:
Following Moody's downgrade of China, the market expects Chinese corporate to face challenges in issuing offshore debts. Among the US$1.42 trillion of offshore debt, only 15% of it went to the intercompany loan market. However, the Chinese Ministry of Finance believes that the debt problem in China will not be a systemic risk. This is due to the fact that 95% of the debt in China is onshore and that China still has a sizable FX reserve.
Since China’s Securities Regulatory Commission issued a guideline to restrict onshore refinancing in the A-share market in February, the size of private placements has shrank significantly in 2017. The average issuance size of private placements in 2016 was 150.7 billion yuan while in April 2017, the issuance size was just 48.6 billion yuan. In the secondary market, more companies have seen stock prices fall below its issue price of their private placements while those applying for private placements will have to offer a larger premium to make their market price.
National Development and Reform Commission announced the current achievement of SOE reform in its website. Twenty SOEs in two batches are now going through reforms. The reforms are mainly focused on the adjustment of corporate structure and inclusion of strategic partners. The third batch of SOEs will include more industries and will also include both central SOEs and provincial SOEs.
China's Ministry of Finance (MOF) held a press conference with regards to Moody's downgrade action. The spokesperson said that Moody's methodology was mistakenly based on the economic cycle and that it overestimates challenges China will face. In response to the debt level, the MOF points out that Moody's does not fully understand the regulatory environment in China as the existing budget law states clearly that governments have no obligations to pay back debt of SOEs and LGFVs. In addition, MOF believes that Moody's underestimates the impact of China's supply side reform.
Fund of Funds is likely to thrive in China as a result of tightened regulation on asset management business. The first FOF was born in 2006. The current AUM of FOF is less than 1.3 yuan trillion in China. As of May 15, 2,309 FOFs were issued in the market. China’s Securities Regulatory Commission first opened applications of mutual fund of funds last November.
CCFED The Third Construction & Engineering Co, a state-owned company, announced an adjustment of salaries for new fresh graduates entering the company. The amended salaries were 50% less than the employment offer initially presented to the graduates. Over 700 graduates have been affected by the salary adjustment but they are able to resign without disciplinary fine.
China Securities Regulatory Commission (CSRC) imposed a window guidance to securities companies currently under IPO review. According to Chinese media, the CSRC has requested a detailed explanation on their respective business models, the reliance on government subsidies/tax reduction, changes in account receivables and connected transactions.
Chinese internet companies listed on US market such as Weibo and JD.com have seen a strong performance in Q1 while the internet startups listed in A-share market have performed poorly. As a result, QDII funds investing in internet companies recorded positive return while the AUM of domestic funds investing in internet companies have fallen. Data from Choice shows that as of May 19, BOCOM CSI Overseas Chinese Internet fund grew 31.48% YTD in net asset value, the most among the same category. Among all stocks, Tencent, Alibaba, JD.com and Baidu are the most popular overseas listed stocks.
China’s Insurance Regulatory Commission (CIRC) has recently issued an official guidance on insurance companies. In the guidance, the CIRC allows insurance companies to invest in infrastructure projects through debt investments including loans and bonds. Credit enhancement arrangement can be waived for large projects registered under the Chinese State Council and with an AAA credit rating. Specifically, CIRC supports insurance companies to invest in the infrastructure projects under the One Belt One Road Initiative. A special fast pass will be provided to applicants investing in those projects to shorten the paperwork time.
According to Chinese media, Chinese property developers are now banned from issuing debt in offshore markets. But it is possible that the panda bond market could be reopened to investment grade developers in the future. Currently, Chinese property developers are moving to REIT products to raise funds. But the Chinese media believes that the regulation towards REITs will also be tightened.
As of May 19, nine mutual funds have been liquidated with a total amount of 3.673 billion yuan, which has exceeded the number of the whole year of 2016. Chinese analysts believe that the tightened regulation towards mutual funds affect the life cycle of conservative mutual fund products. According to Chinese media, market size is the main reason for liquidation and smaller funds are more likely to be liquidated. Since 2014, over 60 mutual funds have been liquidated.
Chinese state owned media Xinhuanet reported that during the One Belt One Road forum, over 270 agreements have been reached in five major categories and 76 sub-categories. Those five categories include regulation, infrastructure, trade, finance and livelihood.
The full list is available here in Chinese: http://news.xinhuanet.com/2017-05/16/c_1120976848.htm
During the One Belt One Road (OBOR) forum held in Beijing, 18 countries including China, UK and Russia have signed on a financing guideline of the OBOR projects issued by Ministry of Finance . It is the first official guideline on OBOR financing. The 27 countries have also complied with this guideline.
The official guideline is available here in Chinese:
According to Chinese media, for the past four months, China Securities Regulatory Commission (CSRC) have issued 45 disciplinary fine letters to Chinese companies. Main violations are regarding the information disclosure, insider trading and market manipulation several Chinese lawyers agree that the CSRC are is tightening its regulation in a bid to lift the cost of the violations.
The People's Bank of China (PBoC) recently set up a fintech committee to oversee the country’s fintech industry. In a press release, the PBoC highlighted the importance of fintech as a driving force of financial innovation. In the meantime, an exploration in regtech through big data, AI and cloud computation can also help identify and mitigate financial risks.
During the One Belt One Road (OBOR) forum held in Beijing, the PBoC signed a cooperation memo with IMF to better finance OBOR projects. PBoC also signed a cooperation memo with Czech National Bank with respect to information and knowledge sharing. In addition, the PBoC announced that it will provide 100 billion yuan of capital to the Silk Road Fund to support the OBOR initiative.
As a policy bank in China, the Export-Import Bank of China has been playing a key role in OBOR initiative. According to Hu Xiaolian, the chairman of the Export-Import Bank of China, the bank has financed 1207 OBOR projects over the past three years. Hu also said in the OBOR forum that the bank will continue to seek international cooperation in providing syndicated loans, trade finance and other financial services.
As China's key development strategy, the One Belt One Road (OBOR) initiative has been attracting a number of countries, which has created a large financing need. Yi Gang, vice governor of the People's Bank of China, says that China will explore possibly find ways to bolster the use of local currencies in the financing of OBOR projects. Currently, China has entered into currency swap contracts with 21 countries participating in OBOR. In addition, Yi also highlighted that a number of OBOR countries have shown strong interest in green financing.
China's State Council has recently issued a proposal on State-owned Asset Supervision and Administration Commission (SASAC) that cuts 43 regulatory issues. The proposal points out that SASAC should avoid much intervention in corporate restructuring and should not directly regulate the activities of SOEs that are shareholders of other companies. The proposal also specifies that SASAC should not intervene self-corporate governance of SOEs. In addition, SOEs at provincial level will be monitored by their group and provincial SASAC.
According to China Banking Association, One Belt One Road investments are not subjected to FX control. Recent FX controls are targeting to crack down FX speculation. The Export-Import Bank of China and Industrial and Commercial Bank of China also admitted that they are not restricted by the FX controls in funding of OBOR projects.
Charles Li, Chief Executive of Hong Kong Exchanges and Clearing Limited (HKEX), said in a seminar in Hong Kong that the Bond Connect Program will be officially announced in the next two weeks. Earlier, some media outlets had reported that the Bond Connect was planned to be launched in July.
Institutional investors are not interested in buying local government bonds due to fears of rising interest rates. Compared to government bonds and bond issued by China’s Development Bank, local government bonds are less attractive despite a higher yield along with higher risks. Currently, over 80% of local government bond investors are banks. To boost the liquidity of the local government bond market the Shanghai Stock Exchange encourages more securities companies to underwrite local government bonds.
Bitcoin price has been rising over the past few weeks. Chinese media have learnt from a source that regulators will issue an official regulation on bitcoin companies focusing on AML (anti money laundering) issues. Since January, Chinese regulators have been investigating Chinese bitcoin platforms. According to Chinese media, the biggest three bitcoin platforms are likely to receive disciplinary fines from Chinese regulators.
Since its announcement on the mixed ownership reform, China Unicom has been proactively pushing its reform program. Wang Xiaochu, chairman of China Unicom said in its shareholders meeting that the mixed ownership reform is difficult because a number of government departments are involved. According to Wang, China Unicom gained 20 million new clients from Tencent and 3 million from Alibaba.
As of April 30, A-share companies have all disclosed their annual report of 2016. In 2016, Bank of Communications (BOCOM) recorded a 17.62% growth in net asset, leading other state owned banks. However, BOCOM's return on equity was poorer than the other four Chinese state-owned banks and all eight Chinese joint stock commercial banks for four years straight. In addition, the cost to income ratio is the third largest among all 13 banks including state owned banks and joint stock commercial banks. Ironically, BOCOM's compensation package for management has been the most attractive among all state own banks for the past two years.
Data from Wind shows that 136 A-share listed property developers are holding 4.92 trillion yuan debt as of end of 2016, 25.93% up from 2015. Moreover, 32 of those 136 companies has a debt ratio of over 80%. The increasing use of debt is a result of declining financing cost of those property developers over the past few years.
Xiao Yaqing, head of State-owned Asset Supervision and Administration (SASAC) said in a press conference that it will support and encourage central SOEs to participate in One Belt One Road projects. Specifically, SASAC will provide regulatory support to SOEs. Currently there are 9112 offshore entities of central SOEs have been set up in 185 jurisdictions. Overseas investment from central SOEs accounted for over 70% of ODI from Chinese non-financial institutions.
Data from the People's Bank of China shows that the FX reserve increased by US$20.4 billion in April, compared to the figure in March. It is the third consecutive month where the FX reserve has increased. SAFE explains that the stabilized FX reserve is a result of steady cross border flow.
Data from the National Bureau of Statistics shows that both export and import growth has slowed down in April. The export increased by 8% while the import increased by 11.9% YOY. Chinese analysts say that the seasonal adjustment of US economy results in a lower export while the strict regulatory environment leads to a weaker import.
Chinese financial regulators, including the People's Bank of China (PBoC), China Banking Regulatory Commission (CBRC), China Securities Regulatory Commission (CSRC) and China Insurance Regulatory Commission (CIRC), have recently stated that they will pledge further support to the One Belt, One Road (OBOR) Initiative.
Specifically, the PBoC will boost renminbi as a dominant currency in the initiative while CBRC will lead and support Chinese banks to participate in the initiative. CSRC will encourage A-listed companies to gain refinancing through the A-share market to participate in OBOR projects, and the CIRC will provide support to the long-term investments of insurance companies.
The National Development and Reform Commission (NDRC) has issued guidance for PPP (Public-Private-Partnership) project bonds. The guidance allows qualified PPP project participants to issue project bonds.
The proceeds can be used for initiating infrastructure projects, managing projects, or paying back existing bank loans. The guidance also states that the cash flow from PPP projects should be used to pay back the project bond principal and interest first. This is the second time the NDRC has provided regulatory support for PPP projects: last December, the NDRC approved PPP securitization under official regulation.
China Insurance Regulatory Commission (CIRC) has issued official guidance that supports PPP projects. The guidance allows insurance companies to invest in PPP projects by providing financing for PPP project participants. The investment can be by way of equity investment, bond investment or a mixed investment.
In addition, CIRC is encouraging PPP projects under the One Belt, One Road Initiative, those in the Beijing-Tianjin-Hebei region, the Yangtze River Economic Belt, and the Xiong'an Economic Zone.
According to Chinese media, the bond connect between Hong Kong and Mainland China will proceed to be launched in several phases. The north-bound connect (Hong Kong investors buying Mainland bonds) will open earlier than south-bound (vice-versa) while institutional investors will enter earlier than retail investors. In addition, the OTC market will open earlier than the exchange market.
Wealth management products offered by banks experienced slower sales in April. Out of the top 10 banks that sell the most the wealth management products, only Minsheng Bank increased their sales from March to April. Others in the top ten saw as much as a 10% decrease in sales.
Behind the drop in sales is a tighter MPA (Macro Prudential Assessment) given by the People's Bank of China, which now considers off balance sheet assets in their assessment. Data from Wind show that back in April, 10,038 new wealth management products were issued, down from 11,823 in March.
As China starts to develop its financial markets, the performance of the LGFV (local government financing vehicles) bond market has become weaker in both the primary and secondary market.
According to Chinese media, the average yield of LGFV bonds increased by 100-200 bps since the end of 2016. Since mid-April, the average yield of a AA-rated LGFV bond reached an average yield of 7%. The higher cost has driven many issuers to postpone or cancel their bond issuances. Data from Wind show that in April, 154 bonds were cancelled or postponed, equivalent to a total of 140.6 billion yuan.
QDII funds increased their investment in US equities in 2017 Q1 from 10 billion yuan to 13.4 billion yuan. The US equities accounted for 21% of the position of all QDII funds, up from 18% in 2016 Q4. Technology sector is QDII's favourite among all industries in the US stock market. Alibaba, Apple and Alphabet are the top three stocks favored by QDII funds, with a total position of 993.9 million yuan, 573.6 million yuan and 184.4 million yuan respectively.
Since this April, China’s Securities Regulatory Commission (CSRC) has adjusted their working schedule, increasing the frequency of IPO application review from two times per week to three times per week. Although the CSRC goes through 13 to 15 applications on average per week, the approval rate has reached a historical low due to stricter requirements. Since the beginning of 2017, 18 IPO applications have been rejected by CSRC. The main reasons for rejections were the decline in profit, connected transactions, lack of independency, uncertainty in sustainable profitability and compliance.
A number of listed companies declared dividends in their 2016 annual report recently. ICBC declared most dividends of 83.5 billion yuan, followed by CCB, Shenhua Group, ABC and BOC. Since being listed in 2006, ICBC has paid a total of 646.5 billion yuan cash dividend. Sinopec Group is the most frequent dividend payer. Since it was listed in 2001, it has paid dividends for 30 times, with a total of 247 billion yuan.
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.