Financial services to China
Trends and Opportunities
China’s financial services sector continues to evolve. Driven by the need to better connect with global financial markets, the focus of China’s reform agenda is on interest rate liberalisation, risk management, capital account convertibility and cross-border investment.
The bank-dominated financial system is also being transformed, with non-bank financial institutions and capital markets seeking to meet the demands of increasingly sophisticated middle-class consumers and business enterprises.
Doing business in China's financial services industry remains challenging due to the complex regulatory environment and markedly different business and consumer cultures. Particular challenges include government intervention in the stock market, speculation in the property market and high debt levels.
Opportunities are enhanced through the China-Australia Free Trade Agreement (ChAFTA) which provides improved market access in the areas of banking, insurance, funds management, securities and futures. In addition, China’s appetite for technology-driven solutions and new business models present emerging opportunities for fintech companies.
Reform and liberalisation of China’s financial services industry is expected to continue. The key questions centre on the nature and pace of change, noting the government’s overarching focus on maintaining stability and social cohesion.
Opportunities for Australian companies include:
- Fintech - continued trend for innovative technological solutions and business models in internet financing, online payment systems, big data analytics, internet credit risk evaluation services, artificial intelligence and blockchain applications.
- Wealth management – due to China’s increased demand for more diverse wealth management products and services. Qualified Domestic Limited Partnership (QDLP) and Qualified Foreign Limited Partnership (QFLP) are two major pilot schemes focused on growing the wealth management options available.
- Funds Management - China has allowed the establishment of the first wholly owned fund management companies in the Shanghai Free Trade Zone. There are also opportunities in pension fund management in collaboration with Chinese insurance companies.
- Financial training (PPP) - includes areas like management training, corporate banking, valuation modelling and consulting.
- Banking – cross-border mergers and acquisitions (M&A), green finance, risk management, industrial chain financing and sub-branches in the Free Trade Zones.
Financial Services Market
The Stock Market
The two main stock exchanges in mainland China are the Shanghai Stock Exchange (SSE) and the Shenzhen Stock Exchange (SZSE). There are 2,928 domestic and foreign companies listed as A-shares or B-shares. This puts the total market capitalisation at RMB53.13 trillion. (Source: China Securities Regulatory Commission, CSRC Statistics, 30 August 2016).
Despite the growing presence of foreign investors, substantial government intervention still takes place in China’s stock market. In January 2016, for example, the Chinese Government responded to a slump in the stock market by cancelling initial public offerings and placing limits on short-selling.
Shanghai Stock Exchange
The Shanghai Stock Exchange (SSE) was established in December 1990 and is directly administered by the China Securities Regulatory Commission (CSRC). A-shares and B-shares are issued at the Shanghai Stock Exchange:
- A-shares are quoted in Chinese Renminbi and only available to foreign investment through a program known as Qualified Foreign Institutional Investors (QFII).
- B-shares are quoted in US dollars and are open to foreign investment.
At the end of 2015, the SSE had 1,081 listed companies with a total market capitalisation of RMB29.52 trillion. In 2015, total annual turnover stood at RMB133 trillion and the average daily turnover reached RMB545 billion. In 2015 RMB871 billion in total capital was raised in the equites market. (Source: Shanghai Stock Exchange, Brief Introduction, 31 August 2016).
A mutual market access program, the Shanghai-Hong Kong Stock Connect was approved and launched in 2014 by the CSRC, allowing investors in Hong Kong and Mainland China to trade and settle shares listed on either market via an exchange and clearing house. The Shanghai-Hong Kong Stock Connect completed its first year in 2015, with HK$2.534 trillion worth of shares traded under the scheme. This includes northbound trade with international investors dealing a total of HK$1.756 trillion worth of Shanghai-listed A-shares in 2015 via Hong Kong brokers. Southbound trade with mainland Chinese investors hit a total of HK$777.73 billion worth of Hong Kong stocks.
The Shanghai-Hong Kong Stock Connect failed to live up to market expectations, but the appetite of the stock exchange and brokers for more connect schemes remains strong. A number of regulatory changes are planned so as to make these cross border schemes a success (South China Morning Post: China Stock Market, 3 January 2016).
Find out more about the regulation of the Shanghai-Hong Kong Connect.
Shenzhen Stock Exchange
The Shenzhen Stock Exchange (SZSE) was established under the administration of the CSRC and is based on a multi-tiered capital markets framework comprising a Main Board, SME Board and the ChiNext market. Its products include equities, mutual funds and bonds.
The SZSE has 1,806 listed companies with 478 stocks on the Main Board, 797 stocks on the SME Board and 531 on ChiNext. As of 30 August 2016 the SZSE had a combined market capitalisation of RMB22 trillion. The product lines include A-shares, B-shares, indices, mutual funds (including ETFs and LOFs), fixed income products (including SME collective bonds and asset-backed securities) and diversified derivative financial products (including warrants and repurchases).
In August 2016 the China Securities Regulatory Commission (CSRC) and Hong Kong Securities and Futures Commission (SFC) issued a joint announcement to approve in-principle the establishment of mutual stock market access between Shenzhen and Hong Kong, the Shenzhen-Hong Kong Stock Connect (Source: Shenzhen Stock Exchange, Market Data, 30 August 2016).
Overseas investors who currently have to obtain their own quotas from CSRC to buy Shenzhen equities are waiting for details on which stocks will be traded through the Shenzhen-Hong Kong Stock Connect and what restrictions will apply to their purchases.
China’s fund management industry emerged in the early 1990s. The CSRC began to regulate the industry in 1997, with the establishment of the first funds management company in March 1998. Since then, market liberalisation has opened the scene to many new players including new FMCs affiliated with banks, securities firms, trust companies and insurance companies. By June 2016, there were 104 mutual fund management companies (44 foreign joint ventures and 60 domestic Chinese companies), managing total assets of RMB8.28 trillion.
In addition to mutual fund management companies, private fund management companies are emerging in response to increasing consumer demand for wealth management options. At the end of 2015 there were 11,224 private funds, with an estimated RMB5.1 trillion under private management, representing a 50 per cent increase from the previous year.
In 2016, China for the first time opened up its markets to overseas private fund managers by allowing wholly foreign-owned enterprises (WFOEs) and joint ventures to raise capital domestically and invest it in private companies and the stock markets. (Source: China Securities Regulatory Commission, Press Conference, June 2016).
At the end of 2015, the National Social Security Fund (NSSF) held RMB191.38 trillion of pension funds, of which 45 per cent of assets were held directly in investments and 54 per cent of the assets were invested and managed by contracted investment managers. In 2015 China’s State Council published investment guidelines allowing local pensions to invest in a wider range of riskier assets, with the maximum stocks and equities ratio set at 30 per cent of total assets. Overseas FMCs have also started to work with local and provincial governments as pension fund managers of portfolio investments. China is trying to shore up its pension system to cope with dual demographic challenges of an ageing population and a shrinking working force. (Source: National Council for Social Security Fund, 2015 Annual Report, 3 June 2016).
Qualified Foreign Institutional Investor (QFII) and Qualified Domestic Institutional Investors (QDII) are the two key licences for foreign financial firms that wish to enter the Chinese fund management industry. A QFII licence is required for foreign financial firms wishing to invest in RMB denominated stocks and fixed income products.
As of August 2016, 296 foreign investment institutions had received licences to conduct QFII business. These include Australia’s AMP Capital Investors, Platinum Investment and Macquarie Bank. The total investment of QFII is currently at US$83 billion. In January 2016, the State Administration of Foreign Exchange removed the investment cap on individual QFII institutions, applying a percentage allocation determined on a case-by-case basis at the time of application of the institution.
QDII licences were first issued in May 2007 and allowed Chinese banks, insurance companies and funds management companies to invest in offshore financial markets. As of July 2016, there were 132 QDII institutions holding investments totaling US$90 billion including:
- US$13.84 billion by commercial banks
- US$37.55 billion by securities companies and fund managers
- US$30.85 billion by insurance companies
- US$7.75 billion by trust companies.
Under the QDII program, the China Banking Regulatory Commission (CBRC), the China Insurance Regulatory Commission (CIRC) and the CSRC defined the scope of investment for QDIIs as follows:
- Commercial banks can invest in overseas fixed income products (e.g. bonds, notes), structured and derivative products and certain equity products (e.g. stocks, public funds). Commodity derivatives, hedge funds and securities below a ‘BBB’ rating are not permitted.
- Security companies and fund managers are restricted to investing in overseas stocks, bonds, depository receipts, real estate investment trusts, public funds, structured products and other financial derivatives that have been preapproved by CBRC.
- Insurance companies are restricted to invest in overseas money market products (e.g. bank bills, negotiable certificates of deposit), fixed income products, depository receipts and certain equity products (e.g. stocks, stock funds).
- Trust companies are restricted to invest in overseas money market products (e.g. bank deposits, depository receipts), bonds and financial derivative products permitted by CBRC.
Renminbi Qualified Institutional Investor (RQFII) was introduced in 2011. The RQFII program permits qualified investors to raise offshore RMB funds and invest directly into China’s onshore securities market. RQFII is less restrictive than the QFII program, allowing investors to invest directly into the bond and equity markets, while also allowing for greater flexibility in terms of liquidity and asset allocation. As of August 2016, there were 168 RQFII licence holders with a total investment of RMB508 billion.
QFIIs and RQFIIs currently account for approximately 1.8 per cent of the total market capitalisation of tradable A-shares. A new scheme known as QDII 2 (Qualified Domestic Individual Investor) has been introduced by the PBOC in October 2015 in six cities including Shanghai, Tianjin, Chongqing, Wuhan, Shenzhen and Wenzhou. QDII 2 offers a channel for Chinese investors to invest offshore. Under QDII 2 investors who are resident in one of these approved cities and who have at least RMB1,000,000 in financial assets are able to make direct offshore investments. (Source: State Administration of Foreign Exchange, QDII Approval Information Sheet, 27 July 2016).
Qualified Foreign Limited Partnership (QFLP) and Qualified Domestic Limited Partnership (QDLP) are two wealth management pilot measures introduced in 2013. Under QFLP, foreign investment institutions are allowed to set up an RMB private investment fund. QDLP allows qualified domestic private RMB funds, established in free trade zones, to invest into offshore securities markets. This scheme is currently on hold due to concerns over capital outflows. (Source: Shanghai Financial Services Office, Innovation Scheme on Financial Services in Shanghai, 25 August 2015).
All four of Australia’s major banks have a presence in mainland China - ANZ, Commonwealth Bank of Australia, NAB and Westpac.
According to the China Banking Regulatory Commission (CBRC) 2015 Annual Report (PDF, Chinese only), total assets of China’s banking sector increased by RMB27 trillion or 15 per cent on a year-on-year basis to RMB199.3 trillion, and total liabilities rose by RMB24 trillion or 15 per cent year-on-year to RMB184 trillion (as at December 2015). In terms of assets, large commercial banks, joint-stock commercial banks, small and medium-sized rural financial institutions and city commercial banks accounted for 39 per cent, 18 per cent, 13 per cent and 11 per cent respectively.
In December 2014, the State Council published the amended rules to ease the requirements for foreign banks. It regulated that from 1 January 2015, China no longer required a specific amount of operating funds to be transferred from the parent foreign bank to its newly established Chinese branch.
Major progress has also been made in transforming rural credit cooperatives to rural commercial banks in an effort to improve management, encourage a more professional workforce, and to enhance the sustainability and capability of the financial services sector overall. From 2014, five private banks with average assets of RMB11.9 billion each were established Hangzhou, Shanghai, Shenzhen, Tianjin, Wenzhou. By the end of 2015, there are also over 100 medium-and-small-sized commercial banks with over 50 per cent of investment from the private sector. (Source: CBRC 2015 Annual Report).
By 2014 there were 909 million Chinese personal internet banking users, representing growth of 20 per cent. Internet transactions totaled RMB60.85 billion in 2014, up 22 per cent according to data released by the China Banking Association. (Source: China Daily, China reports surge of Internet banking transactions, 25 March 2015).
The insurance sector in China is regarded by many as a high potential, yet challenging market.
According to the China Insurance Regulatory Commission (CIRC), China's insurance industry issued RMB2.43 trillion in insurance premiums in 2015 representing growth of 20 per cent. In 2015 total assets insured by the insurance industry increased to RMB12.4 trillion and net assets increased to RMB1.61 trillion, while the insurance industry's gross profit increased to RMB282.4 billion (Source: China Insurance Regulatory Commission).
Recent research from Munich Re predicts China’s ranking in global insurance premium volume will climb from fourth in 2014 to second in 2025, behind the United States. (Source: Ernest & Young, Future directions for foreign insurance companies in China, 2015).
By 2014, 50 foreign insurance companies (22 foreign property insurers and 28 foreign life insurers) had entered the market. (Source: Ernest & Young, Future directions for foreign insurance companies in China, 2015). However, while overseas insurers have managed to increase their share of the market from 4.4 per cent in the first half of 2015 to 5.1 per cent in the first half of 2016, this is considerably less than its peak of 8.9 per cent in 2005. (Source: China Insurance Regulatory Commission).
Australian companies including AMP and Commonwealth Bank of Australia have investments in China’s insurance sector.
Fintech in China is defined by the PBOC (People’s Bank of China) as business-oriented services utilising advanced technologies including big data, cloud computing, block chain, and portable connectivity to enhance the efficiency of financial market operations and customer service.
With a large and growing pool of online consumers, fintech offers enhanced solutions for the delivery of online payments, peer-to peer (P2P) lending, insurance and wealth management services.
Digital payments is one of the largest fintech segments and a rich source of new developments and technologies. China’s 200 or so non-traditional payment platforms are now an established feature of the country’s financial infrastructure valued at RMB24.2 trillion. Alipay and WeChat Wallet dominate the market, followed by other mobile phone backed payment systems operated by large state-owned enterprises (SOEs) and internet companies.
The online wealth management market is in its infancy with the total market size valued at around RMB100 billion at 2015. It is expected to increase at a rate of 200 per cent (Source: China Financial Information Net, 30 March 2016), with growth coming from the younger generations’ strong demand for online wealth management products. Both Tencent and Alibaba entered the market in September 2015.
Online insurance is also a rapidly growing area with online insurance premiums valued at RMB223 billion in 2015, representing an increase of 160 per cent.
In August 2016, China issued Guidelines for Establishing the Green Financial System. The guidelines aim to incentivise green investment and include a series of policy incentives, including but not limited to re-lending operations by the People’s Bank of China, specialised green guarantee programs, interest subsides for green loan-supported projects and the launch of a national-level green development fund.
The guidelines also spell out the important role of the securities market and insurance market in financing green investment, supporting the development of green bond indices, green equity indices and related products, as well as introducing a mandatory pollution liability insurance system. The government also aims to build a mandatory environmental information disclosure system for listed companies and bond issuers. (Source: The People’s Bank of China, 1 September 2016).
There are five key regulators responsible for China’s financial services market. The Ministry of Commerce and the National Development and Reform Committee are also involved.
People’s Bank of China (PBOC)
PBoC was established in December 1948 as China’s central bank. Before 1984, PBoC functioned both as a government department in charge of overall financial supervision and as a national bank with its own comprehensive banking business. In 1984, PBoC formally established its role as the central bank with responsibility over the regulation of the financial services sector.
In December 2003, the PBoC Law was amended to specify that PBoC’s primary responsibilities were monetary policy, preventing and resolving financial risks and safeguarding financial stability.
China Banking Regulatory Commission (CBRC)
CBRC was established in April 2003 to take over the regulatory function of the banking sector from PBoC. CBRC is a ministerial level organisation under the State Council. It is entrusted with the regulation and supervision of banking institutions, asset management companies, trust and investment companies and other depository financial institutions.
The main functions of CBRC are to govern and authorise banking institutions including:
- formulating and enforcing rules and regulations
- overseeing and examining banks and their senior management
- compiling and publishing statistics and reports on the banking industry.
China Securities Regulatory Commission (CSRC)
The major responsibilities of CSRC are to formulate policies and to develop plans, rules and laws for the securities and future markets. CSRC supervises regional and provincial supervisory institutions, securities and futures exchanges, as well as companies. CSRC oversees the issuing, trading and listing of equity shares, bonds, securities investment funds and more.
China Insurance Regulatory Commission (CIRC)
CIRC is authorised by the State Council to manage the administration, supervision and regulation of the Chinese insurance market and to ensure the insurance industry operates in a stable and lawful manner.
The main responsibilities of CIRC include:
- formulating policies, laws and regulations for the insurance industry
- examining and approving insurance companies and their personnel
- supervising the solvency and market conduct of insurance companies according to law.
State Administration of Foreign Exchange (SAFE)
SAFE supervises the foreign exchange activities of China’s financial institutions. Acting on behalf of the PBoC, SAFE has extensive influence over the financial system. Its functions include overseeing the balance of payments statistical system and the governing and supervision of foreign exchange markets and its transactions.
The China-Australia Free Trade Agreement (ChAFTA) entered into force on 20 December 2015. ChAFTA lays an historic foundation for the next phase of Australia's economic relationship with China.
China’s commitments on financial services under ChAFTA deliver new market access in the banking, insurance, funds management, securities and futures sectors. Review of bilateral taxation arrangements is also underway.
China has agreed to reduce the waiting period for Australian banks to engage in RMB business from three years to one year and will also remove the two year profit making requirement as a precondition to provision of local currency services.
Where a branch established in China by an Australian bank already has permission to engage in local currency banking business, other branches established by the same bank will be eligible for streamlined approvals to conduct RMB business.
Removal of the minimum RMB100 million working capital requirement for branches of Australian banks operating as subsidiaries in China, facilitating faster growth and new business opportunities.
Australian bank subsidiaries in China will be the first foreign banks eligible to engage in credit asset securitisation business provided for under China’s Financial Institution Credit Asset Securitisation Pilot Program.
For the first time in a free trade agreement (FTA), China has committed to allow Australian insurance providers access to China’s lucrative statutory third-party liability motor vehicle insurance market without establishment or equity restrictions.
China has also undertaken to provide improved treatment on the establishment of internal branches of Australian insurers.
In the funds management sector, China will also allow Australian securities brokerage and advisory firms to provide cross-border securities trading accounts, custody, advice and portfolio management services to Chinese Qualified Domestic Institutional Investors (i.e. Chinese investors allowed to invest offshore).
The Australian Securities and Investments Commission (ASIC) and the CSRC have agreed to strengthen cooperation and improve mutual understanding of Australia’s and China’s respective regulatory frameworks.
Securities and Futures
China has agreed for the first time in an FTA to:
- Permit Australian financial service providers to establish joint venture futures companies with up to 49 per cent Australian ownership (foreign participation was not previously permitted).
- Extend national treatment to Australian financial institutions for approved securitisation business in China.
- Australian securities firms in China will benefit from new commitments raising foreign equity limits to 49 per cent (above China’s WTO commitment of 33 per cent) for participation in underwriting domestic ‘A’ and ‘B’ shares as well as H shares (listed in Hong Kong) and guaranteeing the ability to conduct domestic securities funds management business.
Bilateral Taxation Arrangements
Australia and China have agreed to review bilateral taxation arrangements as part of the forward work program to improve trade and investment conditions following the implementation of the FTA.
The review will cover existing arrangements relating to double taxation and the prevention of tax evasion. In doing so, the two countries will pay due regard to mutual economic objectives and international taxation standards. (Source: DFAT, Fact Sheet: Financial Services).
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