China opened more of its financial markets to a handful of international derivatives houses this year, which in turn started to structure derivatives that allowed investors around the globe to take a punt on the world's fastest growing economy. The most significant development was deregulation of the 'A' share market to licensed foreign houses, which then offered so-called market access derivatives to give synthetic exposure without the political risk. "The market is moving in big steps," said Anita Fung, treasurer and co-head of global markets at HSBC in Hong Kong.
Citigroup, Morgan Stanley, Nomura Securities and UBS received the first batch of licenses to trade 'A' shares and started offering structured notes (DW, 6/15). Subsequently a flood of major derivative houses, including Goldman Sachs (DW, 7/14), Deutsche Bank, HSBC, Merrill Lynch (DW, 7/28) and Credit Suisse First Boston (DW, 9/28), piled into the nascent market. Previously foreign investors had been restricted to less liquid Chinese 'B' shares or had to invest in Chinese corporates listed in Hong Kong or outside China.
As investors started to realize the potential of the 'A' share market, demand rocketed. "At the beginning of the year there was fairly widespread ambivalence from foreign investors, which changed into a remarkably high and almost overwhelming level of interest," said Justin Kennedy, managing director in Asia-Pacific equity derivatives at Citigroup in Hong Kong. One expert estimated around USD10 billion (notional) of derivatives products had been sold in China.
The fixed-income market also saw advancements in the type of instruments being offered. The Agriculture Bank of China was one of the first mainland entities to invest in a collateralized debt obligation. Goldman Sachs structured the first deal, but Crédit Agricole Indosuez (DW, 6/22) and Lehman Brothers followed soon after, selling similar transactions in China. Mainland banking giant Bank of China also expressed interest in credit products this year.