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China policy and markets round-up: China pledges to be carbon neutral, government bonds get WGBI inclusion, forex regulator assigns fresh QDII quotas

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By Addison Gong
25 Sep 2020

In this round-up, Xi Jinping reveals plans for the country to become carbon neutral by 2060, FTSE Russell decides to include Chinese government bonds in its flagship index, and the State Administration of Foreign Exchange resumes granting new outbound investment quotas.

For the first seven months of 2020, China replaced the US to become the biggest trade partner for the European Union, according to the Ministry of Commerce.

China’s imports to the EU grew 4.9% year-on-year between January and July while US imports dropped 11.7%. Exports to China and to the US from the EU decreased 1.8% and 9.9%, respectively.

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China is aiming for its carbon dioxide emissions to peak before 2030, and become carbon neutral by 2060, president Xi Jinping said at a United Nations meeting this week. Xi said that the Covid-19 pandemic showed that the world needs to develop and live in a green way, and that the human race cannot yet again ignore the warning signs from nature, according to a transcript of his speech published on the government’s website.

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UK-based index provider FTSE Russell plans to add Chinese government bonds to its flagship FTSE World Government Bond Index starting October 2021, subject to a confirmation next March.

The move reflects the “ongoing progress by China toward market reforms and increased access for global investors”, FTSE Russell said.

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The State Council announced plans to improve the quality of listed companies in China in its weekly meeting. One of the measures proposed was to refine the rules on corporate governance and improve information disclosure and transparency. Regulations on asset reorganisation, mergers and spin-offs need to be perfected, alongside rules on follow-ons, bond deals and the delisting of firms, the State Council said.

It will allow more qualified foreign investors to become strategic investors in listed Chinese companies. Different regulators will also strengthen their co-operation to crack down on illegal activities such as market manipulation and insider trading.

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The Hong Kong Exchanges and Clearing plans to relaunch China Ministry of Finance treasury bond (MOF T-Bond) futures in Hong Kong, its chief executive Charles Li said at a conference this week. The bourse introduced five year MOF T-Bond futures contracts in April 2017, before suspending the pilot MoF T-Bond scheme at the end of that year.

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The State Administration of Foreign Exchange (Safe) has granted $3.36bn of quota to 18 institutions under China’s outbound investment scheme, Qualified Domestic Institutional Investor (QDII).

This is the first time the foreign exchange regulator has given fresh QDII quotas in nearly one and a half years. The new limits took the total amount granted under the scheme to $107.34bn for 157 institutions.

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The People’s Bank of China and Safe plan to scrap the limits on outward remittance if foreign institutions use a single currency — either the renminbi or a foreign currency — to invest in the onshore bond market, according to new draft rules released this week.

For those who invest in Chinese bonds in both renminbi and foreign currencies, the foreign currency outward remittance should not exceed 1.2 times of the inward remittance on an accumulated basis. This is a relaxation from the current 1.1 times.

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Vanguard Group has reportedly hired an ex-financial regulator, Luo Dengpan, to run its upcoming Chinese fund management subsidiary. Luo served at the China Securities Regulatory Commission (CSRC) between 2009 and 2012.

Vanguard is among one of the largest global asset managers to have shown interest in a wholly-owned mutual fund licence onshore after China relaxed foreign ownership restrictions for fund managers earlier this year. BlackRock became the first to receive the licence. Fidelity International and Neuberger Berman have also made their official applications.

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The volume of outstanding bonds in the onshore China market hit Rmb111.9tr by the end of August, according to the PBoC. These included Rmb26.2tr of financial bonds, Rmb25.4tr of corporate bonds and Rmb24.8tr of local government bonds.

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Local government bond sales in China in August stood at Rmb1.2tr, taking the total for the first eight months of the year to Rmb4.96tr, said the Ministry of Finance. These included Rmb3.19tr of the so-called ‘special purpose bonds’ to fund infrastructure projects.

On average, notes sold in August had a tenor of 15 years and paid an interest of 3.53%.

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Eight of China’s top regulatory bodies have published new rules on supply chain finance. They require banks and other financial institutions to review their supply chain finance transactions and be aware of problems such as inflated accounts receivables.

For asset-backed securities and asset management products with account receivables as the underlying assets, underwriters and asset managers must complete due diligence and the necessary risk control procedures, and strengthen information disclosure requirements, the regulators said.

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State-owned companies in China reported a 6% year-on-year increase in revenues in August. For the first eight months of 2020, their revenues totalled Rmb38.26tr, which was 2.1% lower than a year ago.

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The Ministry of Finance sold Rmb5bn of bonds in Hong Kong this week, tapping the two and five year notes it printed in July. The new Rmb3.5bn 2022 bond was priced at 99.39 with a 2.44% yield, and the new Rmb1.5bn five year at 98.22 or 2.59%.

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On Thursday, the PBoC issued Rmb10bn of bills in Hong Kong. The six-month bills were sold at 2.68%, after investors from Asia, Europe and the Americas put in over Rmb35bn of orders, said the central bank.

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The Securities Association of China has assigned rankings between A and C to 96 securities houses based on their corporate bond businesses in 2020. Twenty-seven of the firms — including domestic champions like Citic Securities, China Securities Co and China International Capital Corp — were given an A rating. Fifty others fell under the B ranking and 19 were assigned C.

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The central bank plans to increase its oversight on online lending. Some internet companies will be regulated as financial holding companies, said Fan Yifei, deputy governor of the PBoC, at a forum this week. China announced new rules on financial holding firms earlier this month.

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The CSRC’s Shenzhen bureau has issued a warning to securities analysts. In order to catch topics that are trending in the market, some analysts reduced the time spent on researching and writing, and produced low-quality reports, the regulator said.

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China Evergrande Group’s bond and share prices were heavily hit on Thursday, when a document was circulated online about the reorganisation of Hengda Real Estate, its property arm and flagship subsidiary. The document, dated August 24, showed Evergrande’s plea to the Guangdong government to support a backdoor listing plan. If the proposal fails, it could lead to Rmb130bn in payments to strategic investors in January 2021.

Evergrande issued a statement titled ‘solemn declaration’ on the stock exchange in Hong Kong on Thursday evening, denying the rumours, saying the document was fabricated, and calling it “pure defamation”.

By Addison Gong
25 Sep 2020