ASIFMA CEO Mark Austen said the association’s team met senior regulators in Beijing last week and shared a report with roughly 50 recommendations to improve China’s capital markets in six areas: equities, fixed income, forex, laws and regulation, market infrastructure and market access.
They received a “very positive reception for the recommendations”, he said at a breifing in Hong Kong yesterday.
Harmonising programs
One recommendation is to “harmonise the requirements of similar access programmes”.
An example would be the 2016 opening of the China Interbank Bond Market (CIBM) to foreign institutional investors. The CIBM has neither quotas nor repatriation limits on investments. The earlier channels, Renminbi Qualified Foreign Institutional Investor (RQFII) and Qualified Foreign Institutional Investor (QFII) broadly used by big institutions to invest onshore, however, face a repatriation limit of 20% a month.
“The rationale from the Chinese authorities is that they want to provide a more flexible program to attract new money. From our point of view, you have to be fair and equal to all investors, especially for those who commit long-term to China.
“Our view is to bring those QFII and RQFII programs in line with CIBM one as soon as possible to encourage investments into China in the short term,” said Austen.
The association wants the removal of all repatraition limits and quotas across all access programmes. However, this would undermine capital controls authorities have put in place to stem capital outflows.
“China is already [a big market], and if the market is further developed with more liquidity and depth, investors are more likely to stay,” Austen said. This is a better method of market development than regulators “trying to trap the capital with repatriation limits”.
Hedging tools
Another major concern is on hedging tools for currency, interest rates and credits. “In general, it’s difficult to hedge risks onshore because of the lack of market liquidity,” Austen said.
The Chinese government has recently allowed foreign investors to trade onshore forex futures for hedging. However, it is uncertain which programmes will benefit from such measures, noted Eugenie Shen, head of the association’s asset management group.
Investors demand more hedging tools onshore, such as credit default swaps, as futures are not currently traded among Chinese banks, which are the major holders of bonds, added Patrick Pang, head of fixed income and compliance.
WFOE issues
Some foreign asset managers, such as Fidelity, have set up a wholly foreign-owned enterprise onshore, however, the majority are holding back. One reason is tax-related.
“One requirement is that within six months of registering as a [private securities investment fund manager] WFOE, you have to launch a fund,” Shen said. “The question from asset managers is: In this current market, is it a good time to launch funds?”
Although many global asset managers show interest in applying for a WFOE, “foreign firms may have to overcome various `technical difficulties’, such as how to first obtain an appropriate corporate name and business scope registration for `investment-type’ enterprises, because repatriations [for these structures] were temporarily suspended in early 2017. It is still unclear when the local authorities will reinstate such repatriations,” the report noted.
Also, there are various types of WFOEs in different jurisdictions for different business scopes, FSA reported earlier.
“It’s nice to have more reforms and relaxations, but if you have too many of these access programmes, people might want to say, let’s hold back and wait for a better one to come along,” she said.
She added that the apparent halt in approving funds for sale in China through the Mutual Recognition of Funds scheme was another issue raised.
ASIFMA members are from banks, asset managers and other financial services providers.
