Power of long-term investment opportunities

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Visitors visit Standard Chartered’s exhibition stand at an exhibition in Shanghai. Standard Chartered Hong Kong has applied for the establishment of a wholly-owned securities company in Mainland China. [PHOTO by WU JUN/FOR CHINA DAILY]

Foreign Players Head to China’s Capital Market and Financial Services Industry

China’s high-level opening up and reform of caps on corporate ownership are yielding rich dividends for the country’s financial services sector in general and the capital market in particular, experts said.

More and more foreign entities like brokerage houses and investment banks are expanding their global footprint in China even as Chinese companies tap foreign stock exchanges for additional funds. All of this leads to a healthy pattern of two-way capital flows, in addition to boosting related market segments like derivatives. Additionally, existing foreign players in China are increasing their portfolios of financial products, they said.

There are good reasons for foreign companies to do so, the market gurus said, pointing out that in the current global scenario, the Chinese market represents a solid opportunity to earn decent returns on large investments.

Take Bridgewater Associates, for example. In the first half of this year, the world’s largest hedge fund posted impressive gains of 4.76% on its investments in the Chinese stock market. What makes Bridgewater’s performance exceptional is that over the same period, the local benchmark, the Shanghai Composite Index, lost as much as 6.63%, global indices comparable to the foreigner not doing much better either.

No wonder foreign players are rushing for a slice of the Chinese market pie. Their rush coincides with the broader trend of deepening financial reform and opening up, which should also facilitate the internationalization of the renminbi and strengthen China’s influence on commodity prices.

On September 15, the China Securities Regulatory Commission, the country’s top securities watchdog, accepted an application from Intesa Sanpaolo, Italy’s largest banking group by total assets, to establish a foreign controlled securities in China.

If the application is successful, the proposed joint venture will be established in Qingdao, Shandong Province, East China. Intesa Sanpaolo will take a 51% stake while the rest will be shared by three local companies.

Intesa Sanpaolo is set to become the 10th foreign financial institution to set up a securities brokerage firm with a majority stake in China.

Many other foreign players are lining up to play in China. Among them are well-known names such as Standard Chartered, SMBC Nikko Securities and BNP Paribas, all of which have already submitted similar applications and are awaiting CSRC approval.

For overseas players who haven’t had a taste of the Chinese market yet, Bridgewater was a revelation. The latter’s new product, launched quietly in association with local partner CITIC Securities in June, has sold like hot cakes to investors. Its 200 million yuan ($27.85 million) quota sold out instantly.

Investors in China, market experts said, appreciated Bridgewater’s eye-catching overall performance in the first half of the year, led by its weatherproof, multi-asset portfolio.

In an online forum in May, Ray Dalio, the founder of Bridgewater, expressed confidence in China’s investment prospects. Given the relatively low asset prices in China right now, long-term investment opportunities are implicit here, he said.

Similarly, in early August, Black-Rock, the world’s largest asset manager, launched a new product focused on advanced manufacturing companies listed on the A-share market. This is the third product in this type of the industry giant in China since its emergence in June 2021 as the first fully foreign-owned mutual fund company.

“The launch of BlackRock’s all-foreign business in China and the release of (its) (financial) products can prove to foreign financial institutions the effectiveness of the continued opening of the Chinese capital market. The Chinese government is willing to facilitate foreign institutions’ access to China by deploying necessary policies and providing necessary resources. Entering China will definitely be a success under such circumstances,” said Zhang Chi, Managing Director of BlackRock Fund Management. Co.

Many experts agree that the deepening of the open policy has not slowed down despite the resurgence of COVID-19 cases this year.

For example, on July 4, trading via exchange-traded funds – ETFs – under the equity connection mechanism between Shanghai, Shenzhen and Hong Kong officially began. Mainland Chinese investors gained access to four ETFs listed on the Hong Kong stock exchange while 83 ETFs listed on the Shanghai and Shenzhen stock exchanges became available to international investors through the northern branch of the connection programs.

As of September 1, about 1.04 billion yuan of trades had been made under the ETF connect’s northern leg, while the value of transactions under the southern leg was $12.5 billion. HK ($1.59 billion).

Abby Wang, head of China asset management for KPMG in China, said the inclusion of ETFs in the connection programs is another major milestone in the high-level bilateral opening up of China’s capital market.

The connection programs, which started by linking the Shanghai and Hong Kong stock exchanges in 2014, were extended to the London Stock Exchange in 2019. This allowed Chinese companies to issue global certificates of deposit or GDRs on the Frankfurt and Zurich stock exchanges in February. in accordance with the latest CSRC guidelines.

In less than six months, no less than six A-share companies have successfully issued GDRs on the SIX Swiss Exchange.

The widened scope of connection programs is another breakthrough in opening up China’s capital market, as it has successfully attracted resources from around the world, said Tian Xuan, associate dean of the PBC School of Finance at the University. Tsinghua.

In addition to the traditional equity sector, China’s financial openness has extended to derivatives trading. On September 5, the CSRC announced that Qualified Foreign Institutional Investors and Renminbi Qualified Foreign Institutional Investors can trade 23 designated commodity futures contracts, 16 option contracts and equity option contracts in China.

The move was eagerly awaited as part of the opening-up policy, said Luo Xufeng, chairman of Nanhua Futures, adding that it will facilitate the internationalization of the renminbi and strengthen China’s influence on prices in global markets. commodities, which have been rocked by geopolitical tensions for much of this year.

Besides capital markets, China’s broader financial services industry has benefited from the process of deepening opening-up. China has lifted ownership limits on securities firms, banks and insurance companies.

China’s top banking and insurance regulator has approved the establishment of more than 120 foreign banking and insurance institutions in China between 2018 and 2021. Another 11 foreign banking institutions opened in China last year, with 929 foreign banking institutions operating altogether. Their total net profit approached 21.28 billion yuan in 2021, up nearly 25 percent year on year, the China Banking Association said.

The China Economic Information Service calculated that Shanghai was home to 1,707 licensed financial institutions last year. The total number of financial institutions in the city exceeded 10,000, of which foreign financial institutions accounted for 30%.

Consequently, competition has stiffened and investment strategies have diversified, adding both breadth and depth to the market.

The change in investment style can be seen in the faster shifts this year in the direction of northern capital – the funds that foreign investors use to buy into the A-share market through equity connection programs.

While northbound capital reported a net inflow of 74.2 billion yuan in June, the scene changed to a net outflow of 21 billion yuan in July. A month later, another turnaround led to a net inflow of 12.7 billion yuan.

Wang Chunying, deputy head of the State Administration of Foreign Exchange, said the short-term volatility of cross-border securities investment can be seen globally. It’s only normal that an increasingly open financial market like China should experience such volatility, she said.

Overall, the northbound capital saw a net inflow of 52.2 billion yuan in the first nine months of this year, according to CSRC data. As of August 26, foreign investors had invested nearly 21.3 billion yuan in international futures products such as yuan-denominated crude oil futures.

At the 2022 China International Finance Annual Forum held in early September, CSRC Vice Chairman Fang Xinghai said foreign investment in China’s capital market has shown strong resilience. over the past few months. The continued inflow of foreign capital has confirmed the confidence of international institutions in China’s long-term economic growth.

At the 14th Nomura China Investor Forum earlier this year, Toshiyasu Iiyama, Executive Managing Director of Nomura Holdings Inc and Chairman of its China Committee, said that they are preparing to apply for an investment banking license in China, a sector of activity which will be the next objective. for the Japanese securities company.

“The best is still ahead of us as we steadily increase our presence and build a sustainable business in China. We are optimistic about the growth prospects of the market and our business as we support financial sector reforms and the opening of the financial market,” he said.

BlackRock is attending an exhibition in Munich on October 5. It became the first global asset manager authorized to start a wholly-owned onshore mutual fund business in China. PHOTO by ALEXANDER POHL/SIPA USA]

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