The week in renminbi: CSRC officially lifts foreign ownership caps, extra time for WMP rules compliance, FTSE Russell bullish on dim sum
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The week in renminbi: CSRC officially lifts foreign ownership caps, extra time for WMP rules compliance, FTSE Russell bullish on dim sum

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Securities watchdog moves the foreign ownership limit in securities and asset management companies to 51%, regulators extend grace period for financial institutions to comply with wealth management product rules, and FTSE Russell says dim sum will thrive despite onshore opening.

Policy:

  • The China Securities Regulatory Commission (CSRC) confirmed on Saturday that foreign investors will be able to take majority ownership — with the ceiling raised from 49% to 51% — in local securities houses. The change took place with immediate effect.

    The securities watchdog also made clear that foreign shareholders hoping to take majority ownership must be financial institutions with a good reputation globally, a sound track record in scale, revenue, and profit, and high long-term credit ratings over the past three years. Initially, the business scope of these JVs will be limited to the expertise of the controlling shareholder, but the JVs could change this by applying for securities-related licences, said the CSRC.

    The foreign ownership cap has also been lifted to 51% for fund management companies, a spokesperson at the CSRC told an April 28 press conference.

    The regulations came after the CSRC published the draft version in early March. The spokesperson noted that a number of international financial institutions from Europe and Asia have expressed an interest in taking majority ownership in local JVs during the consultation period.

  • China will give local banks and other financial institutions until the end of 2020 to comply with the tightened regulations on WMPs, a spokesperson at the People’s Bank of China told an April 27 press conference. The PBoC previously planned to enforce the rules by June 2019.

    The extension will ensure that asset managers, which are heavily exposed to WMPs, have enough time to comply with the new rules, said Tommy Xie, an economist at OCBC. He added that the new rules will break the implicit guarantee culture in the onshore market. In line with the November draft, the rules will ban asset managers from offering products with a guaranteed rate of return.

    “Asset management products should be priced based on fair value methodology,” he wrote in an April 30 memo.

    Suan Teck Kin, head of research at United Overseas Bank, reckoned the new rules will help regulators crack down on shadow banking activities, the bulk of which involve WMPs. The analyst noted that the sector reached Rmb100tr ($15.8tr) by the end of last year, according to the PBoC’s own estimates.

    “This is what the new regulations attempt to address,” he said. “It remains to be seen how effective the new regulations will be, though it is definitely a step in the right direction in addressing the concerns of shadow banking risks in China.”

    The new rules were jointly published by the PBoC, the China Banking and Insurance Regulatory Commission, the CSRC, and the State Administration of Foreign Exchange.

Bonds:

  • The dim sum market will continue to be active despite opening up of onshore fixed income, which allows foreign investors greater access to RMB bonds, according to a report by FTSE Russell.

    The index provider said tighter onshore liquidity, triggered by the government’s ongoing deleveraging efforts, rising interest rates in the US, and the prospect of a stronger RMB exchange rate will all help the offshore renminbi market to thrive.

    The dim sum and onshore RMB market are likely to sit side by side, catering to the needs of investors with different appetites, according to Li Zhanying, director of fixed income indexes at FTSE Russell.

    “In terms of bonds that are attractive to foreign investors, government and policy bank bonds may continue to be appealing from the perspective of higher yields for similar credit rating sovereigns, and lower risks and relatively stable CNY outlook for real money investors,” said Li. “While for hedge funds, certificates of deposit (CDs) have been attractive so far and may continue to be the target for carry trades.”

    FTSE Russell, quoting data provided by Standard Chartered, said dim sum issuance, including CDs, is on track to reach Rmb310bn this year, almost double that of the issuance volume in 2017. The FTSE Dim Sum Bond Index recorded an 8% rise in market size between end of January and March this year.

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