www.nicsa.org | #WebinarWednesdays Investing in Chinese Capital Markets January 10, 2018
www.nicsa.org | #WebinarWednesdays
Stéphane KarolczukPartner, Head of Hong Kong OfficeArendt & Medernach
Florence LeeHead of China Sales & Business Development - EMEA HSBC Bank PLC
Allison Lovett – Moderator Vice President, Content ManagerNICSA
www.nicsa.org | #WebinarWednesdays
Access to China MarketHSBC Securities Services
Florence LeeHead of China Sales & Business Development - EMEA
HSBC Securities Services
www.nicsa.org | #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
www.nicsa.org | #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
www.nicsa.org | #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 MarketChina has the world’s 3rd largest bond market
4
www.nicsa.org | #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 ConnectNorthbound Operating Model
www.nicsa.org | #WebinarWednesdays
Source: slide extracted from HKEX presentation6
China-Hong Kong Stock ConnectMarket Infrastructure – Connect with Shanghai and Shenzhen
www.nicsa.org | #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 InclusionChina-A shares and China bonds
www.nicsa.org | #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.
DisclaimerHSBC Bank Plc
8
www.nicsa.org | #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
DisclaimerHSBC Bank Plc
www.nicsa.org | #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
www.nicsa.org | #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
www.nicsa.org | #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
www.nicsa.org | #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
www.nicsa.org | #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
www.nicsa.org | #WebinarWednesdays
consequences in case of removal and/or replacement of the R-QFII licence holder orinvestment manager
specific risks in relation to R-QFII investments, specific restrictions or managementtechniques set in relation to R-QFII investments
eligibility of instruments to be invested in and markets on which those instruments are tradedor listed
foreign exchange aspects and mechanisms in place to ensure redemptions on a regularbasis (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
www.nicsa.org | #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
www.nicsa.org | #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
www.nicsa.org | #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
www.nicsa.org | #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
www.nicsa.org | #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
www.nicsa.org | #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.
DisclaimerArendt & Medernach