Shanghai FTZ vs. Qianhai. PPF, HPF and EAs

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1 China Institutional Business Development: Quarterly Update September 2013 Upcoming Programs Mutual Recognition & QDII 2 Mutual Recognition and QDII2 are two up-and-coming programs that could jump start outbound investments on the Mainland and create new onshore opportunities for foreign asset managers. Onshore Opportunities Shanghai FTZ vs. Qianhai These regions offer different incentives, creating headaches for managers deciding between the two. Successful firms will register operations in both locales, leveraging possibilities both have to offer. QDII Quota by Industry, July-End (USD bn) Bank 10.7 Trust 4.9 Brokerages 6.5 Insurance 26.6 FMC 37.9 Source: Z-Ben Advisors, SAFE, Wind Guangdong s PPF Surplus New Investors on the Block PPF, HPF and EA Combined Assets, 2012-End (RMB tr) RMB400bn PPF, HPF and EAs NCSSF s strong returns for Guangdong s RMB100bn mandate could encourage the province to dedicate more of its pension surplus to NCSSF if year-two of its contract also achieves a solid performance. PPFs, HPF and EAs provide an accumulated RMB5.5tr in potential mandate opportunities. Current restrictions limit these institutions to be part of a foreign manager s long-term strategy, however HPF PPF EA Source: Z-Ben Advisors China Institutional Business Development Quarterly Update Z-Ben Advisors Shanghai 1

2 Z-BEN ADVISORS Ltd. (Hong Kong) Two Exchange Square, 39/F 8 Connaught Place Central, Hong Kong SAR Research Affiliate Z-BEN ADVISORS Ltd. (Shanghai, China) 上海泽奔商务咨询有限公司 Hongjia Tower, Unit 2502 Lane 388, Fushan Road Pudong New Area, Shanghai China Disclaimer The contents of China Institutional Business Development: Quarterly Update (Product hereafter) are for informational purposes only. The data contained herein is based entirely upon the available information provided in public reports by the locally operating fund managers. The contained information has been verified to the best of Z-Ben Advisors and its research affiliates ability, but neither can accept responsibility for loss arising from the decisions based upon the product. The Product does not constitute investment advice or solicitation or counsel for investment in any fund or product mentioned thereof. The Product does not constitute or form part of, and should not be construed as, any offer for sale or subscription of and fund or product included herein. Z-Ben Advisors and its research affiliate expressly disclaims any an all responsibility for any consequential loss or damage of any kind whatsoever resulting, directly or indirectly, from (a) the use of the Product, (b) reliance on any information contained herein, (c) any error, inaccuracy or omission in any such information or (d) any action resulting therefrom. Disclosure Z-Ben Advisors and its research affiliate, currently provides other products and services to some of the firms that are included in the Product. Z-Ben Advisors and its research affiliate may continue to have such dealings and may also have other ongoing business dealings with other firms provided for in the Product. Copyright The duplication of all or any part of the Product is strictly prohibited under copyright law. Any and all breaches in that law will be prosecuted. No part of the Product may be reproduced, transmitted in any form, electronic or otherwise, photocopied, stored in a retrieval system or otherwise passed on to any person or firm, in whole or in part, with out the prior written consent from Z-Ben Advisors. China Institutional Business Development Quarterly Update Z-Ben Advisors Shanghai 2

3 Table of Contents Executive Summary 4-5 Regulatory Developments 6 Qianhai and Shanghai FTZ at a Glance Outflow Channel Developments 7 Mainland Brokerages No. of Hong Kong Subsidiaries Upcoming Opportunities 8 Mutual Recognition Overview Mutual Recognition 9 AUM Ranking of Potential Foreign Participants CIC s New Head 10 Overview of Past CIC Chairman Candidates CIC 2012 Results 11 % of CIC s Internally- and Externally-Managed Assets SAFE Investments Competition with CIC 12 CIC and SAFE s Investments Global Comparison NCSSF and Regional Mandates 13 Guangdong s Mandate Rate of Return NCSSF s Offshore Custodian Banks 14 NCSSF s Custodian Bank Requirements Insurance QDII Liberalization 15 QFII/RQFII Licenses and Quota Owned by Insurers (RMB m) Insurance JV FMCs 16 China Life s Investment in Mutual Funds (RMB bn) Public Pension Funds 17 Accumulated AUM & Existing Deficit of PPF (RMB tr) Housing Provident Fund 18 AUM of Housing Provident Fund (RMB tr) Enterprise Annuities 19 AUM and Estimated Growth of Enterprise Annuities QDII Quota Overview 20 QDII Quota (USD bn) in 2007 QDII Quota (USD bn) in 2Q13 FMC QDII FoF 21 No. of QDII FoFs and Invested Volume (RMB bn) Trust QDII 22 List of Countries Approved for Trust QDII Access AUM of Trust QDII Products (USD bn) Brokerage QDII 23 AUM of Brokerage QDII Products (USD m) Existing Brokerage QDII Products Insurance QDII 24 ULIPs Annual Sales (RMB bn) Market Share by AUM (RMB bn) Bank QDII Offshore Products 25 Custodian and No. of Products Under Custody Domicile Location of Offshore Products Offshore Product Distribution 26 No. of Distributors Used Appendix I: QDII Participants Appendix II: FMC QDII Funds China Institutional Business Development Quarterly Update Z-Ben Advisors Shanghai 3

4 NCSSF and Regional Mandates NCSSF s total AUM reached RMB1.1tr by the end of 2012, achieving a 7.01% investment return. Capital appreciation aside, NCSSF s RMB100bn mandate from Guangdong s public pensions fund (PPF) was a contributing factor to the fund s AUM growth in NCSSF s superior returns, compared to Guangdong's in-house investments, serve as one major indication that an easing or removal of investment restrictions on PPFs can help the funds beat inflation and achieve higher returns. Although Guangdong s case is a positive signal of PPF liberalization, the provincial mandate has yet to be opened to external managers. Guangdong Mandate s Rate of Return 8% 7% 6% 5% 4% 3% 2% 1% 0% 2.0% Before Outsourcing to NCSSF Source: Z-Ben Advisors, NCSSF, MOHRSS 4.0% Expected by Guangdong Government 6.8% After Outsourcing to NCSSF Guangdong s two-year mandate, which has been under NCSSF s oversight for a little over six months, realized an annualized return of 6.8%, beating local pensions average return of 2% and Guangdong s expected returns of 4%. We believe that NCSSF conducted the majority of the investments on behalf of Guangdong in house, most likely with a heavy allocation to fixed income. During the remaining tenure of its contract, the investment of Guangdong s mandate could become more aggressive, with some allocation to equities and perhaps even a small amount to alternative investments. During this time, NCSSF may look to external domestic managers to outsource parts of Guangdong s investments. It is unlikely that Guangdong s mandate will have allocation to overseas markets during the term of its current two-year contract as the province will be most concerned about capital appreciation and safety. Should Guangdong mandate a long-term contract to NCSSF, however, the fund may begin to outsource assets to foreign managers. This would be a positive signal that PPF mandates could soon include offshore investment. By the end of 2012, Guangdong s PPF reported a surplus of RMB400bn. Considering the fact that its RMB100bn mandate to NCSSF achieved higher returns than when independently managed, it is possible that the province could mandate more assets to NCSSF next year upon the renewal of its contract. Despite the fact that Guangdong mandated a chunk of its PPF to NCSSF in 2012, we have yet to see other provinces follow suit. We do not expect to see other provincial PPFs mandate a portion of their surplus accounts to NCSSF during the remainder of this year. MOHRSS plans for pension reform including the expectation for upcoming regulations on PPF investment could be one major reason why provincial PPFs are staying put. PPFs will most likely wait until MOHRRS provides clear guidelines on their ability to mandate assets to NCSSF before PPFs make investment decisions. China Institutional Business Development Quarterly Update Z-Ben Advisors Shanghai 13 4

5 QDII Quota Overview Despite an overall decline in outstanding quota, all financial industries with the exception of some FMCs appear to be making small moves to build on their QDII operations. While some segments, such as FMCs and brokerages, enjoy a much more liberalized QDII investment scope than others (especially compared to trusts and banks), each platform may be drawing on their individual strengths to attract investors. Obvious variables driving investors choice of platform are still unclear, but we suspect influential factors include cost and investment focus, as seen through the continued offering of global fixed-income products. QDII Quota (USD bn) in 2007 QDII Quota (USD bn) in 2Q13 Trust 6% Brokerage 10% Brokerage 8% Bank 16% FMC 43% Bank 12% FMC 44% Insurance 30% Insurance 31% Source: Z-Ben Advisors, SAFE Source: Z-Ben Advisors, SAFE Five FMCs returned a combined USD4bn in QDII quota in Q2, dragging down the figure for total QDII quota issued. Alternatively, a total of four QDII funds were launched in 2Q13, most of which were focused on fixed income. Brokerages QDII operations remain fairly underutilized despite the recent regulatory liberalization that enabled all brokerages to receive quota. Top-tier firms are predominantly those that are currently launching QDII funds. Mid-tier insurance companies have begun applying for QDII quota. It remains to be seen whether these firms will use their quota to make overseas investments or to issue globally-focused Unit-Linked Insurance Plans (ULIPs). Trusts QDII AUM continued to fall despite fast-paced industry growth. No new quota or top-ups were applied for in 2Q13. Although some large trust companies have expressed interest in QDII, none have yet launched a product. China Institutional Business Development Quarterly Update Z-Ben Advisors Shanghai 20 5