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China: Electronic Trading Offshore Global Markets

By Alan Dean
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.
What are the opportunities and who would be the beneficiaries thereof?
1. Chinese Funds

  • Tapping the Global Markets trading experience; obviously, there is an abundance of highly motivated experienced resources available in the offshore global market place that can help these QDII Funds with their transition into trading global markets.
  • Avoiding the trap of legacy; the advantage these funds will have over western funds is that they will be able to acquire and implement the latest “best in class” solutions and thus not be steeped in legacy systems to hold them back.
  • Leaping ahead of western Funds; the advantage of hindsight is always useful and often can only be utilised anecdotally, as the moment has probably already passed. In the case of the QDII market inside China, they have this advantage and if leveraged appropriately, the Chinese Funds can setup bespoke highly focused operations designed to succeed with their challenges of electronic trading of the offshore global markets.
  • By leveraging the more modern technologies; typically built around the Financial Information eXchange (FIX) Protocol, these QDII Fund operations could go straight to the top of the class, without suffering the pain or risks associated with the last 20 years the west has endured as part of our learning curve.
  • Spoilt for Choice; the QDII Funds will not have any shortage of organisations putting their hands out to assist them with their transition in trading offshore global markets – their challenge would be to seek out the most useful.

2. Offshore Banks and Brokers

  • New Customer base; the opening of the Qualified Domestic Institutional Investors (QDIIs) market place, brings about a new client base that can be mined.
  • New source of cross-asset revenue; the QDII’s will be seeking to implement investment strategies that enable them to trade equities, futures and fixed income; most of which will have the risk of currency fluctuations, which means foreign exchange (FX) hedging as well. According to Z-Ben Advisors, total industry Asset Under Management (AUM) growth is projected to be Rmb6.9tr (USD1.0tr) by 2014, rising to Rmb15tr (USD2.2tr) or more by 2020.
  • Imbedded value creating stickiness; for those organisations who have their own technology Intellectual Property (IP) or business solutions that can be leveraged by the QDII’s as part of their operations, whether it be front, middle or back office, this can be an advantage over competitors.