China: Electronic Trading Offshore Global Markets
As recent history shows, China has a vast and diverse economic system, which contains a number of economic sub-systems, many of which have experienced growth in the last 36 months. In the media, headlines portray China to be an economic powerhouse, with expansion plans that have far reaching implications for these domains, including electronic trading in Financial Services.
One area that has seen much attention from western companies in the financial sector over the last two years is that of the Qualified Domestic Institutional Investors (QDIIs). More and more of the QDIIs, are gradually being granted authorisation by the Chinese government to trade global offshore securities in the stock, bonds and other securities. QDII programs are used in places where the capital markets are not yet completely open to all investors. For example, any institutional investor in China that obtains approval to be a QDII may invest up to 50% of net assets into allowable foreign securities, so long as not more than 5% is invested in any one security.
Background on some recent changes to the QDII programme
According to DeaconsLaw.com, the China Securities Regulatory Commission (CSRC) has confirmed it had signed Memorandum of Understandings (MOUs) with four jurisdictions, namely Australia, Germany, Korea and Luxembourg, in addition to Hong Kong, United Kingdom, Singapore, Japan and USA over the past year. This means for commercial banks, QDII investment products issued by commercial banks may invest in listed stocks and mutual funds supervised by the relevant regulatory bodies in these jurisdictions. Also, in the case of Chinese fund management companies (FMCs); in 2009 the FMCs were permitted to extend their asset management services to multiple-client accounts, following single client segregated account services, which were launched during 2008. Whereas now, FMCs may expand their managed account asset management services to include investments in offshore markets and mutual funds as well as offering QDII funds.
To be able to invest offshore, FMCs need to apply for a new QDII investment quota or use any balance of their existing QDII investment quota (originally granted for the launch of QDII funds), provided an approval is obtained from State Administration of Foreign Exchange (SAFE).
Trading offshore – Global Markets
Global Markets may be a new experience that some of these Chinese Funds’ find they have insufficient understanding or experience to adequately deal with.
This perceived shortfall of global markets trading experience manifests itself in both an opportunity and a threat, each with their own risks, neither of which can, nor should be ignored. Prudence and patience should be employed when prioritising the financial services opportunities in China; with their exceptionally high savings rate and positive trade balance providing an abundance of capital, some of which is targeted at foreign investment – Qualified Domestic Institutional Investors (QDIIs), this is a fledgling sector and is transitioning very slowly.
What is important for western companies to consider is that a lot of leg work will be necessary, whilst it may feel like a fruitless exercise, it is important to stick at it and be sure that your value proposition is appropriately reviewed in the right forum.
The financial services arena in China, is no stranger to electronic trading, this can be seen with their domestic solutions, which demonstrate a good deal more Straight Through Processing (STP) than most western organisations.