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Realising onshore opportunities – the latest China investment trends

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From investing in onshore securities to launching local investment products, foreign institutions are taking advantage of China’s increasingly open financial markets.

International investors enjoy an unprecedented level of access to China’s onshore financial markets. With more than 4,000 listed companies1 and high yields on local debt compared to other countries2, it should be no surprise that institutional investors are leveraging greater freedoms to allocate capital to the world’s largest emerging market. From 2014 to late 2020, foreign ownership of onshore stocks and bonds saw a near eight times increase to RMB5.7 trillion (USD$837 billion)3.

After years of ongoing reform, there are now a variety of access channels to onshore China – each providing a route to different securities, as well as rules for trade and settlement.

How international investors are utilising China’s regulatory framework was the subject of a panel discussion at the 2021 HSBC Global Emerging Markets Forum. The expert panellists shared insights on access channels and trade execution, as well as how foreign institutions are launching their own funds onshore.

China onshore opportunities

Renewed interest in QFI

In November 2020, China merged the Qualified Foreign Institutional Investor programme (QFII) with its sister renminbi-denominated scheme RQFII, resulting in the new Qualified Foreign Investor initiative (QFI). In addition, regulators removed a number of requirements to apply for a QFI license and made it easier to repatriate both principal and gains.

“These changes were very welcome, as they had been on investor wish lists for many years,” said Russ Jacobsen, Head of China Equity Execution Strategy, HSBC. Levels of interest in QFI surged, with 200 applications made in less than a year, he said, representing a tenfold year-on-year rise.

One of QFI’s main advantages is that it provides a broad range of access to the entire range of securities available in onshore China. For example, a QFI holder can buy stocks in any A-share company and even participate in local IPOs. By contrast, Stock Connect only allows for secondary market trading of a specified list of shares.

More generally, Mr. Jacobsen highlighted several areas in the A-share market where there is strong demand among foreign investors. Private placements have overtaken convertible bonds as a fund-raising channel, after the introduction of new rules in 2020 increased the investor pool and allowed for deeper discounts.

The onshore stock borrow market is also developing. Mr. Jacobsen said it would be a focus for QFI holders going forward - especially hedge funds that will be able to borrow inventory that was difficult to access in the past.

Electronic execution

Electronic trading plays an important role in supporting the growth of offshore to onshore trading volumes. Digital platforms optimise and automate workflows, while supporting both direct access and algorithmic strategies. The solutions on offer depend on whether an investor is using Stock Connect, which leverages the technology on the Hong Kong exchange, or QFI, where the trading platform is provided by the onshore broker.

“What we are seeing is that international brokers, and I think that HSBC is one of the leaders on this front, are investing heavily on technology onshore,” said Fabien Melero, Head of Equities Electronic Trading, Asia Pacific, HSBC. “All the technology from our expertise in Stock Connect has been leveraged into our onshore entity in China.”

Going forward, Mr. Melero said that trading technology in China will only continue to become more sophisticated. But at the same time, he hopes that there is harmonisation with other markets, both in terms of the trading solutions available to foreign and local investors, and regarding the rules that govern onshore trading more generally.

Going local

Recent regulatory moves provide opportunities beyond investing in securities. One of the most significant developments in 2021 is foreign financial institutions establishing domestic businesses.

“We are seeing more and more global companies – including asset managers, hedge funds and securities firms – focus on developing their onshore plan,” said Patrick Wong, Head of China Business Development and Client Management, Markets and Securities Services, HSBC.

For asset managers manufacturing local investment products, the main attraction is the immense size of the market. China’s fund industry is growing rapidly, with households forecast to have USD46.3 trillion of investable assets by 20254. There are opportunities in everything from mutual funds for retail investors and private funds targeting high net worth individuals.

Ownership of the onshore subsidiary is an important consideration for foreign financial institutions entering the market. It is no longer necessary to have a joint venture with a local partner, as establishing a Wholly Foreign-Owned Enterprise (WFOE) is now an option.

For companies that already have a joint venture in China, there is often a desire to acquire a 100% stake in the business, said Mr. Wong. This delivers complete control over strategy and reduces potential culture clash between the two partners.

Long-term reform

The opening up of China’s onshore markets to international capital is a long-term process that started when QFII was launched in 2002. Progress has been steady ever since, with accelerated regulatory activity in recent years making it easier to invest in onshore securities, execute with electric tools, and establish local subsidiaries. Looking to the future, foreign financial institutions can expect more beneficial reforms to come.

To find out more, please speak to your HSBC Relationship Manager.

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