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Investing in Chinese Capital Markets


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China has become the second-largest economy worldwide. The country’s equity market ranks second, and its fixed income market ranks third among world markets. What are the options for investment funds and institutional investors to access these markets? Will they further open to foreign investors? Join us for an educational discussion around the “Dos and Don’ts” of accessing the Chinese capital markets.

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Investing in Chinese Capital Markets

  1. 1. | #WebinarWednesdays Investing in Chinese Capital Markets January 10, 2018
  2. 2. | #WebinarWednesdays Stéphane Karolczuk Partner, Head of Hong Kong Office Arendt & Medernach Florence Lee Head of China Sales & Business Development - EMEA HSBC Bank PLC Allison Lovett – Moderator Vice President, Content Manager NICSA
  3. 3. | #WebinarWednesdays Access to China Market HSBC Securities Services Florence Lee Head of China Sales & Business Development - EMEA HSBC Securities Services
  4. 4. | #WebinarWednesdays China - Multiple Access Routes Onshore Access Offshore Access (via HK) Equity Bond Stock Connect Bond Connect QFII RQFII CIBM Direct QFII - Qualified Foreign Institutional Investor RQFII - RMB Qualified Foreign Institutional Investor QFII RQFII 2
  5. 5. | #WebinarWednesdays  Expanded to 18 sites, with a total RQFII quota of RMB1,740 billion.  HSBC is the only custodian that serves investors in the13 out the 18 countries.  Total approved QFIIs is 310 as of end November.  HSBC has 100% success rate in QFII application and is awarded Best QFII Custodian (2014-2017) Eligible stocks are accessible through this channel, covering all China A-shares included in the MSCI indices.  Northbound: total 10 HK domiciled funds have been approved for distribution in China under the MRF scheme RQFII Inbound Investment Bilateral QFII Stock Connect Mutual Fund Recognition Outbound Investment  Qualified Domestic Institutional Investor  Global traditional asset class, fund or derivatives  Qualified Domestic Limited Partnership  Overseas master fund QDII QDLP  Third largest bond market in the world.  As of 03 November 2017, there are 20,772 investors participating in CIBM, of which 755 are foreign institutions and products. CIBM  Access the CIBM market.  There are 210 registered investors as of end November 2017.  Eventually will be a bilateral channel. Bond Connect (north-trading link) Cross-border Opportunities 3
  6. 6. | #WebinarWednesdays Onshore Market Structure Source: HSBC CSDCCCDC/SCH CFETS listing Bond Issuers SSE/SZSEBanks Interbank Market OTC Market Exchange Market Bond Investors listing SpotSpot/repo Spot/repoT+0 Source: HSBC, Bloomberg China Bond Market China has the world’s 3rd largest bond market 4
  7. 7. | #WebinarWednesdays Offshore Hong Kong Mainland China 1. Bond Connect Company Limited, jointly owned by CFETS and HKEX, will support and assist admission and registration for Northbound investors, and liaise closely with the international Access Platforms under Bond Connect  International investors trade via global platforms with assets held in custody via a Hong Kong (CMU) nominee structure  Mainland regulators fulfil their requirements for transparency and control Source: HKEx International investors Global Custodian Global Access Platforms HKEX CMU Member s HKMA CMU CFETS CFETS Bond Trading System CCDC + SHCH Mainland dealers BCCL1 Trading Settlement Trading Link Settlement Link Existing interface Existing interface Nominee structure 5 China-Hong Kong Bond Connect Northbound Operating Model
  8. 8. | #WebinarWednesdays Source: slide extracted from HKEX presentation 6 China-Hong Kong Stock Connect Market Infrastructure – Connect with Shanghai and Shenzhen
  9. 9. | #WebinarWednesdays  Effective from 1 Mar 2017, China onshore bonds were included to two newly created indices  Tracking AUM ~USD 2 trillion  Potential to include CIBM into Global Aggregate Index Bloomberg-Barclays Fixed Income Indices Citi Fixed Income Indices  Effective in Feb 2018, China onshore bonds are included to existing and newly created indices  Tracking AUM ~USD 2 trillion  Potential to include CIBM into WGBI JP Morgan Fixed Income Indices  China onshore bonds placed under review for inclusion in JPM’s fixed income indices  Possible inclusion in JPM Government Bond Index – Emerging Markets (GBI-EM) and other investment grade bond indices such as Emerging Market Bond Index (EMBI)  Tracking AUM ~USD 200 billion Market estimated USD250+ billion of offshore deployment to China onshore bonds catalysed by index inclusion Source: Market research reports, index providers, slide extracted from HKEX presentation  Last June, MSCI announced a 0.73% China A-share inclusion by two phases in May and August of 2018. This will include 222 Large Cap companies which are accessible through the two stock connect programmes.  The MSCI EMI is currently being tracked by cUSD1.6trn of global assets, about 15% of which are passive funds. (initial fund inflow c. USD 17.5bn).  Included China A-shares in its global benchmarks by launching two new transitional EM indices in May 2015. Market estimated once 100% of A-shares are included over the next 5-10 years, foreign fund inflows to top cUSD500bn (cRMB3.5trn). 7 MSCI FTSE Index Inclusion China-A shares and China bonds
  10. 10. | #WebinarWednesdays This document is issued by HSBC Bank plc, Luxembourg Branch (“HSBC”). HSBC does not warrant that the contents of this document are accurate, sufficient or relevant for the recipient’s purposes and HSBC gives no undertaking and is under no obligation to provide the recipient with access to any additional information or to update all or any part of the contents of this document or to correct any inaccuracies in it which may become apparent. Receipt of this document in whole or in part shall not constitute an offer, invitation or inducement to contract. The recipient is solely responsible for making its own independent appraisal of the products, services and other content referred to in this document. This document should be read in its entirety and should not be photocopied, reproduced, distributed or disclosed in whole or in part to any other person without the prior written consent of the relevant HSBC group member. HSBC Bank plc is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. HSBC Bank plc is registered in England under No.14259, with registered office at 8 Canada Square, London, E14 5HQ, United Kingdom and acting through its Luxembourg branch whose office is at 16, Boulevard d’Avranches, L-1160 Luxembourg and registered with the Luxembourg Register of Commerce and Companies under number B-178455. HSBC Bank plc, Luxembourg Branch is regulated in Luxembourg by the Commission de Surveillance du Secteur Financier. Copyright: HSBC Bank plc, Luxembourg Branch 2017. ALL RIGHTS RESERVED. Disclaimer HSBC Bank Plc 8
  11. 11. | #WebinarWednesdays This document is issued by HSBC Bank plc (“HSBC”). HSBC is authorised by the Prudential Regulation Authority (“PRA”) and regulated by the Financial Conduct Authority (“FCA”) and the Prudential Regulation Authority and is a member of the HSBC Group of companies (“HSBC Group”). HSBC has based this document on information obtained from sources it believes to be reliable but which have not been independently verified. Any charts and graphs included are from publicly available sources or proprietary data. Except in the case of fraudulent misrepresentation, no liability is accepted whatsoever for any direct, indirect or consequential loss arising from the use of this document. HSBC is under no obligation to keep current the information in this document. You are solely responsible for making your own independent appraisal of and investigations into the products, investments and transactions referred to in this document and you should not rely on any information in this document as constituting investment advice. Neither HSBC nor any of its affiliates are responsible for providing you with legal, tax or other specialist advice and you should make your own arrangements in respect of this accordingly. The issuance of and details contained in this document, which is not for public circulation, does not constitute an offer or solicitation for, or advice that you should enter into, the purchase or sale of any security, commodity or other investment product or investment agreement, or any other contract, agreement or structure whatsoever. This document is intended for the use of clients who are professional clients or eligible counterparties under the rules of the FCA only and is not intended for retail clients. This document is intended to be distributed in its entirety. Reproduction of this document, in whole or in part, or disclosure of any of its contents, without prior consent of HSBC or any associate, is prohibited. Unless governing law permits otherwise, you must contact a HSBC Group member in your home jurisdiction if you wish to use HSBC Group services in effecting a transaction in any investment mentioned in this document. Nothing herein excludes or restricts any duty or liability of HSBC to a customer under the Financial Services and Markets Act 2000 or the rules of the FCA. This presentation is a “financial promotion” within the scope of the rules of the FCA. HSBC Bank plc Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority Registered in England No. 14259 Registered Office: 8 Canada Square, London, E14 5HQ, United Kingdom Member HSBC Group DISCPRES0413 9 Disclaimer HSBC Bank Plc
  12. 12. | #WebinarWednesdays Opening of the PRC capital markets and China Access Channels Evolution of the regulatory approach for Luxembourg UCITS funds Stéphane Karolczuk Partner, Head of Hong Kong Office Arendt & Medernach
  13. 13. | #WebinarWednesdays  Possibility to invest in / take exposure to a wide range of asset securities listed in Hong Kong, Singapore or securities traded on other regulated markets (such as Dim Sum bonds issued in Hong Kong or elsewhere), A-Shares, A-Shares financial indices, RMB fixed income securities, etc  Possibility to use a UCITS structure in conjunction with R-QFII license/quotas. Allocation of R-QFII quotas by managers based in Hong Kong, but also in the UK, France, Germany, South-Korea, Taiwan, Singapore, Switzerland, Qatar, etc… and Luxembourg  Investments in A-Shares and listed RMB bonds but also in RMB fixed income securities dealt with on the China Interbank Bond Market (CIBM) with or without licences  Possibility to use a UCITS with QFII/RQFII license/quotas  Possibility to use UCITS with Stock Connect, CIBM and Bond Connect Overview – China Access Channels and UCITS 2
  14. 14. | #WebinarWednesdays  Before 2012, indirect investments in the PRC via p-notes or other derivative instruments with China A-shares or other PRC assets as underlying assets. Direct investments in the PRC were very limited  Concerns over the liquidity of the China A-shares market/foreign exchange controls  Reason of such limited access: QFII rules not fully compatible with UCITS rules since (i) lock-up period of 1 year, (ii) monthly repatriations, (iii) regulatory approvals required prior to repatriations, (iv) other limitations  As a result, limitation to the exposure to China A-Shares (in Luxembourg to 35% of the NAV of the UCITS) QFII and UCITS (1/2) 3
  15. 15. | #WebinarWednesdays  End of December 2012, new QFII rules issued by PRC authorities  Creation of the concept of Open-ended China funds, i.e. “open-ended securities investment funds that are established abroad in public offerings, [with over 70 percent of the funds invested in China]” • Lock-up period of 3 months but possible specific arrangements • Weekly repatriations • Overall limit of 20% of the quota per month  Requirement for 70% investment in the PRC capital markets to qualify as Open-ended China Fund no longer applicable (as per SAFE public announcements)  In February 2016, new QFII rules update permitting in particular daily liquidity.  As a result, the regulator in Luxembourg agreed, as a matter of principle, not to limit exposure to China A-shares in UCITS qualifying as QFII open-ended China funds QFII and UCITS (2/2) 4
  16. 16. | #WebinarWednesdays  R-QFII open ended funds (i) are not subject to a lock-up period, (ii) can proceed to daily repatriations and convert freely from RMB into any other currencies, and vice- versa within the limits of the R-QFII quota and (iii) are not subject to maximum repatriation amounts per month  The compatibility with UCITS was not an issue, however, the possibility to delegate the portfolio management function and allow sub-managers to use their R-QFII quotas with a foreign fund structure was not clear until end of 2013  R-QFII sub-management (delegation of portfolio management function to an R-QFII manager) model is now widely accepted  Extension of the R-QFII regime to jurisdictions other than Hong Kong (including Luxembourg) and use of those R-QFII quotas with their UCITS  Luxembourg R-QFII quota used with Luxembourg UCITS and management companies R-QFII and UCITS (1/3) 5
  17. 17. | #WebinarWednesdays  consequences in case of removal and/or replacement of the R-QFII licence holder or investment manager  specific risks in relation to R-QFII investments, specific restrictions or management techniques set in relation to R-QFII investments  eligibility of instruments to be invested in and markets on which those instruments are traded or listed  foreign exchange aspects and mechanisms in place to ensure redemptions on a regular basis (fund currency, share classes and related currencies, hedging techniques)  due diligence and selection process applied to brokers and sub-custodians  safekeeping/conditions of account opening of/for the fund assets  segregation of assets with the PRC custodian Questions to address in the application R-QFII and UCITS (2/3) 6
  18. 18. | #WebinarWednesdays  additional considerations in case the R-QFII licence holder or investment manager wishes to invest in securities traded on the China Interbank Bond Market (CIBM)  description of the characteristics of the CIBM  description of the specific risks relating to the issuers  information on risk management techniques enabling to mitigate default risks  information on the credit rating review process  CSSF annual report 2014 Questions to address in the application R-QFII and UCITS (3/3) 7
  19. 19. | #WebinarWednesdays  Following the revised rules issued by the People’s Bank of China in summer 2016, CSSF is allowing UCITS managers to have direct access to onshore RMB fixed income securities dealt on the CIBM.  Managers may therefore increase their allocation to RMB fixed income securities without QFII or RQFII licenses and quotas  Conditions to be fulfilled: • Formalities to be handled by the relevant managers in China with their bonds settlement agents and the People’s Bank of China • Prior approval by CSSF • UCITS prospectus to include a reference to CIBM Direct Access and particular risk disclosures in the prospectus CIBM Direct Access 8
  20. 20. | #WebinarWednesdays  Stock Connect between the Hong Kong Stock Exchange and the Shanghai Stock Exchange launched in November 2014  Luxembourg UCITS authorized to make use of Stock Connect as from December 2014, subject to certain conditions: • Stock Connect qualifies as regulated market for UCITS; • Proper segregation of assets throughout the custody chain; • No counterparty risk over the broker (no “free of payment” but DVP); • Proper disclosures in the prospectus and the KIID.  CSSF annual report 2014  Integrated vs. multi-broker models  Central Bank of Ireland position regarding Stock Connect The “Connect” programs (1/3) Stock Connect 9
  21. 21. | #WebinarWednesdays  Connection to the Shenzhen Stock Exchange  Structure similar to the Hong Kong Shanghai Connect from a legal perspective  Not raising major issues in a UCITS environment The “Connect” programs (2/3) Stock Connect 10
  22. 22. | #WebinarWednesdays  Connection to the CIBM  Structure similar to the Stock Connect from a legal perspective  Not raising major issues in a UCITS environment  Similar requirements and questions from the CSSF  R-DvP not yet available for bonds settled through the CCDC  CSSF approves UCITS making use of Bond Connect subject to conditions The “Connect” programs (3/3) Bond Connect 11
  23. 23. | #WebinarWednesdays This presentation of Arendt & Medernach is designed to provide with summarized information and illustrations regarding the topics covered by such a presentation. This information and those illustrations are not intended to constitute legal advice and do not substitute for the consultation with legal counsel required before any actual undertakings. Disclaimer Arendt & Medernach
  24. 24. Q&AQUESTIONS & ANSWERS SESSION | #WebinarWednesdays
  25. 25. | #WebinarWednesdays WEBINAR SPONSORED BY: