COUNTRY REPORT CHINA 2008 1. Economic and financial background 1.1 China's economy has maintained steady and rapid growth in 2007. For the year ending 2007, gross domestic product (GDP) grew at a pace of 11.4%, and reached RMB 24.8 trillion Yuan. In 2007, China's consumer price index (CPI) rose 4.8% year-on-year, the highest since 1997. The figure was 3.3 % higher than that posted in 2006. Given the excess liquidity in banking system, huge pressures on money and credit expansion, and record-level inflation, the monetary policy stance was gradually shifted from a sound policy to a tight policy. Table 1: Key Economic Indicators 2006 2007 June 2008 Population (10,000 persons) GDP (RMB billion Yuan) Total retail sales of consumer goods (RMB billion Yuan) Consumer Price Index CPI (%) Total value of foreign trade (US$ billion dollars) Balance of household deposits (RMB billion Yuan) RMB-USD exchange rate 131448 132129 N/A 21192.3 24953 13061.9 7641 8921 5104.3 1.5 4.8 7.9 1760.7 2173.8 1234.2 16158.7 17253.4 19781.5 7.8087 7.3046 6.8591 1.2 In the first half of 2008, the adverse factors in the global economy, such as the slowing world economy, the rocketing oil prices internationally and snowstorms in winter, a deadly earthquake in May domestically, have all adverse impact on the production and economy, but the fundamentals remained unchanged. GDP grew 10.4% to RMB 13.06 trillion yuan in the first half year which was 1.8 % lower than the same period a year ago. China s investment in fixed assets increased 26.8% and reached RMB 6.84 trillion yuan, contributing to the investment in urban fixed assets which was RMB 5.84 trillion yuan. CPI surged 7.9 % and food price which account for 6.64% grew 20.4%. The average income of urban residents in China rose by 6.3% in the first half. The per capita income of urban residents was up 14.4 percent to RMB 8065 yuan. At end-june 2008, household deposits grew by RMB 2.2 trillion, reaching RMB 19.8 trillion. Since the inflation pressure was not eased, the People s Bank of China 22 nd IIFA Annual Meeting Montreal Oct 2008 1
(PBC) maintained the tight monetary policy in the first half. It has raised the bank reserve ratio for the fifth times in the half year. 1.3 In 2007, the financial market was stable throughout the year. The money market liquidity was further improved, the issue scale of bound market was growing rapidly, and the number of institutional investor has been increased. The bond varieties were increasingly diversified, with the proportion of long-term bonds increased evidently. To foster the corporate bond market, the financing company was permitted to issue bond in inter bank market. Assets securitization was improved and 4 commercial banks issued RMB 17.8 billion asset-backed securities. 1.4 Trading of China s stock market was active in 2007. The benchmark for Shanghai and Shenzhen Stock Composite Index hit the record high along with the high frequency of IPO and the return of red-chip stocks. On 16 th Oct 2007, the benchmark Shanghai Stock Composite Index reached a record high of 6,124 points. For the whole year, the benchmark for Shanghai and Shenzhen Stock Composite Index grow up 96.66% and 162.81% respectively making China the best-performing market in the world. The stock trading volume was RMB 45.47 trillion, up by 409.87% from the post year. As for the IPO, a total of 447.32 billion RMB was raised through equities, rising by 172.34%, topping the world. The market value also experienced explosive growth during the past year. The aggregated market capitalization amounted to RMB 32.7 trillion from RMB 8.94 trillion in 2006, up by 268.6%. The passion of investing warmed up. Official statistics show that the number of Chinese A share equity investors expanded to 110.53 million by the end of 2007, up 50.95% from the year before. Market capitalization from 1998 to Jun 2008 350000 300000 250000 200000 150000 100000 50000 0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Jun 2008 year mar cket capi t al i za tion 1.5 In the first half of 2008, the financial market remained stable. The money market interest rate went up, and the bond market grew modestly month on month; both the inter-bank bond index and the exchange T-bond index shifted upward. In the first half, the inflation pressure on economy was still not loose. On the other hand, the 22 nd IIFA Annual Meeting Montreal Oct 2008 2
progress of non-tradable stock accelerated. Due to various domestic and international factors, the stock index fluctuated amid a downward trend. The Shanghai Stock Composite Index opened at 5272.8 points at the beginning of 2008 and closed at 2736.1 points at end-june, down 48%. Table 2: Key Statistics of China s Securities Market 2006 2007 June 2008 Number of listed companies 1434 1550 1607 Number of investors' opened accounts (10,000) Stock Market Capitalization (RMB trillion Yuan) Tradable Stocks' Market Capitalization (RMB trillion Yuan) Shanghai composite Index Number of Bonds (excluding central bank notes) Total Face Value of Bonds (RMB trillion Yuan) 7853.98 9280.59 9937.35 8.94 32.71 17.80 2.5 9.31 5.96 2675.47 5261.56 2736.1 685 997 1088 6.02 7.98 3.99 2. Key trends in flows and assets under management 2.1 Influenced by the economic situation and the fluctuation of the stock market, the fund industry is facing giant systematic risks this year, with the amount of fund assets and the fund performance fluctuated frequently. Table 3:Main statistics of China's securities investment fund industry (only including public funds) 2006 2007 June 2008 Number of fund management companies 57 59 60 Number of joint venture fund management companies 24 29 30 Total number of funds 321 346 379 Net asset value of total funds (RMB billion Yuan) 868.15 3276.55 2005.14 Number of closed-end funds 53 35 31 Net asset value of closed-end funds (RMB billion Yuan) 160.47 239.47 78.42 22 nd IIFA Annual Meeting Montreal Oct 2008 3
Number of open-end funds 268 306 348 Net asset value of open-end funds (RMB billion Yuan) 707.68 2927.94 1926.72 Ratio of net asset value of total funds to GDP (%) 4.12 13.13 N/A Ratio of net asset value of total funds to household savings (%) 5.37 18.99 10.14 Percentage taken up by the market value of A share held by funds in the total market value of A shares (%) 18.12 25.78 21.65 Number of open-end fund accounts (10,000) 1050.22 8538.16 N/A 2.2 Since 2006, based on the development of capital market and excellent fund performance, the investment in fund is booming, and peaked in 2007 with incredible increase. By the end of 2007, the fund assets amount increased by 282.29% to RMB 3276.55 billion, while the number of open-ended fund grew to 306 from 268, up by 14.2%. The proportion of fund assets to GDP has also increased from 5.37% in 2006 to 18.99% in 2007. Meanwhile, the number of open-ended fund accounts in 2007 climbed highly to 85.38 million, out of which, 85.26 million are individual investors, while the rest 0.12 million are institutional investors. 2.3 The number of funds keeps increasing in 2008. Until July 30 th of 2008, with an increase of 9.5% from 2007, the number of funds has reached 379, out of which, 348 are open-ended funds and 31 are close-ended funds. However, the fund assets amount has decreased for the tremendous fall in A-share market. Until July 30 th of 2008, fund asset amount has fallen to RMB 2005.14 billion by 38.8% from 2007. The proportion of fund assets to residential savings has also decreased to 10.14% by the end of July from 18.99% at the year beginning. As shown in the following graph, compared with the same time period, a slim growth has been seen in fund assets. 22 nd IIFA Annual Meeting Montreal Oct 2008 4
The Share and net assets value of open-end funds 2.4 Regarding the development of each fund type, equity fund has improved the most based on the positive performance. As described in Table 4, from 2006 to 2007, as for equity fund, the fund number has increased from 75 to 182, while the assets amount jumped to RMB 1187.08 billion from RMB 106.78 billion, up by nearly ten times. On the other hand, the number of bond fund only slightly increased to 37 from 17, while the assets amount doubled, reaching RMB 65.43 billion. For money market fund, the asset amount even declined. In the recent years, the whole asset amount of the investment funds increased stably from RMB 1823.3 billion to RMB 2005.13 billion. Though the number of equity fund and hybrid fund has both increased by around 20, the asset amount only increased by more than RMB 30 billion for the deteriorating performance of equity market, At the same time, relying on its stable profitability, bond fund became popular with its asset amount reaching RMB 133.58 billion from RMB 75.15 billion. 22 nd IIFA Annual Meeting Montreal Oct 2008 5
Table 4:Open-ended funds by types (June 2006 to June 2008) Year June 2006 June 2007 June 2008 Net asset Net asset Fund Number Number Number of Net asset value(billion value(billion type of funds of funds funds value(billion RMB) RMB) RMB) Equity fund 75 106.78 182 1187.08 201 1224.95 Hybrid fund 76 136.15 77 495.61 94 534.51 Bond fund 17 24.6 37 65.43 44 133.58 Money market 35 124.27 51 75.15 40 112.1 fund Total 203 391.8 347 1823.27 379 2005.13 2.5 At the end of Jun, 2008, the stock-linked fund accounting for 87%, topping the first place, while the bond fund and money market fund almost held the same proportion of 7% and 6% respectively. Open-end funds by types ( June, 2008) 7% 6% 27% 60% Equity fund Hybrid fund Bond fund Money market fund 2.6 In 2007, investor demand for investment funds increased due to the well performance. The subscription and redemption of all investment funds in 2007 reached 2994.5 billion shares and 1896.16 billion shares respectively. Net subscription was 1098.34 shares. Higher inflows to almost all kinds of investment funds except guaranteed bond fund. 22 nd IIFA Annual Meeting Montreal Oct 2008 6
2.7 With the unprecedented prosperity of fund market, the net asset value of total funds increased rapidly leading to the ownership structure movement in 2007. Household became the largest investors in the investment funds for the first time. As household have increased their reliance on high-risk fund (equity fund and hybrid fund), their demand for fix income bond and money market bond grew slowly. In 2007, household investors held 63.6% of total investment funds. 2.8 From the year 2006, commercial bank become the most important fund distribution channel as its branches spread all over the country. In 2007, the commercial banks channel still dominated the fund distribution channel, accounting for 73.47% of total fund sales. The outstanding amount of fund sales reached 3612.88 billion RMB through the entire distribution channel, mainly guaranteed by commercial banks, Security Company, fund management company, respectively, RMB 2795.2 billion, 408.9 billion and 408.7 billion. Online trading platform has been improved, up five times than the year 2006. 3. Regulatory and self-regulatory developments 3.1 QDII Business was initiated In July 2007, following the example of Hua an Investment Fund, Trial Treasures on Overseas Securities Investment by QDII was promulgated, and the business of QDII (Qualified Domestic Institutional Investors) was started among fund companies all around. The measures made detailed prescription for the requirements on qualification of QDII, product design, fund raising, overseas investment consulting, asset manager, investment operation and information disclosure. It required the fund companies to have a minimum of 200 million RMB in net asset and no less than 2 years in the asset management business to apply for the license of QDII business. As of the end of September of 2008, 24 fund management companies obtained the qualification of QDII. 3.2 Fair Trading was promoted With the issues of Trial Treasures on Special Clients Assets Management for Investment Fund Management Companies, it became the focus of all society that the different investment portfolio under the management of the same companies should be treated equally. In March of 2008, CSRC published the Guidance on the Fair Trading System in Securities Investment Companies in a bid to optimize the trading system in fund management companies and to protect the legal benefits of investors. The Guidance extended the scope of fair trading system to cover all of the investment products, including the subscription in primary market, trading in secondary market, authorization of investment, research and analysis, investment decision, trading operation and performance valuation, especially the key step of investment decision. It attached great importance to the internal control in the investment decision to provide system basis for fair trading by safeguarding fairness in the investment decision. 3.3 Appropriate Sales of Securities Investment Fund was developed In October 2007, CSRC promulgated the Guidance on the Appropriate Sales of Investment Funds which required the fund sales institutions to sell the proper fund products to proper investors. Its main content is that fund sales institutions should learn the investment objectives, investment objectives, investment experience and their endurance of risk of investors and then should sell the products of different risk to the investors with different risk endurance. The Measures worked as a good pacifier for the blindfold investment fund fashion while regulating the sales channels for the investment fund sales. 22 nd IIFA Annual Meeting Montreal Oct 2008 7
3.4 Electronic Information Disclosure was started In September of 2008, CSRC promulgated Regulation of Fund Information Disclosure XBRL and No 1 Model of Quarter Report for Fund Information Disclosure, which showed that substantial progress was made in the application of XBRL in the information disclosure of fund industry. This will be of great significance in the improvement of efficiency of information application and standard operation of fund industry. It will promote the information disclosure and information service to develop orderly. 3.5 The Professional Proficiency of Securities Funds Salespersons were improved In order to strengthen the self-regulation of fund sales and to regulate the fund sales of fund companies and fund sales institutions, The Securities Association of China published the Code of Practice of Securities Investment Funds Salesperson. In the meantime, SAC organized the Qualification Examination for fund salespersons to improve their competence. 200,000 candidates registered in the first exam which will be held in 41 cities in September of 2008. The examination will play an important role in popularizing of fund knowledge and improving the proficiency of salesperson for investment funds. 4. Corporate governance Aiming to protect the interests of small investors and attract more funds into its equity markets, China has been moving to improve transparency and corporate governance among listed companies. At the end of 2007, China Securities Regulatory Commission (CSRC) ordered publicly-traded companies to boost corporate governance in the latest move to stabilize the equities market. A long-term mechanism should be put into place to prevent the majority shareholders from embezzling funds of the listed firms. Board directors, supervisors and senior executives would be turned in to prosecutors if found helping the embezzlement. CSRC would not approve any stock incentive and refinancing applications if they failed to meet the deadline. 5. Fund governance 5.1 In June 2007, CSRC issued Notice on Fund Industry Employee Investing towards Securities Investment Fund, which definitely point out that fund industry employees are allowed to held the investment fund. At the end of June 2008, the statistical information shows that the total investment fund shares held by own employee in fund management companies reached 248 million and the total investment fund shares held by fund companies and shareholders reached 11.57 billion. 5.2 In August 2007, Fortune SGAM Fund Management Co., Ltd released an incentive plan towards fund managers. According to the plan, the company will hold the same shares as fund manager and earning of both shares will belong to the fund manager. In March 2008, the scale of the plan expanded to research analyst. 5.3 On October 2007, CSRC issued Guidance on Internal Control for Investment Fund Distributors, aiming to regulate fund distributors corporate governance, improve risk management and protect fund investors legal rights. The Guidance made detailed regulations for the first time on decision-making procedure, risk evaluation, 22 nd IIFA Annual Meeting Montreal Oct 2008 8
authorization controlling and branch agencies management in fund sales agency. 6. Products Innovation CSRC issued Probational Principles of Special Clients Assets Management for Investment Fund Management Companies. The principle allowed fund management companies to design portfolio management plan for one or multi-clients to meet their financial objectives. The plan for one client, the net assets of qualified fund Management Company was supposed to RMB 200 million in the latest season and the asset of the client should not be below to RMB 50 million. The qualified fund management company can pick up 20% reward from the net income. At the end of 2008, the number of qualified management company was 28. At the same time, the transform from closed-end fund to open-end fund was going on. 7. Investor education Since CSRC ordered fund management company to help individual investors better understand the risks in buying fund shares in 2007, the fund management company has been keen on investor education. Various investor education programs were developed and delivered include advertisements in TV, newspapers and magazines, Internet, publicity pamphlets and outdoor ads. In 2007, the payout for investor education of fund management companies was over 163 million RMB. The fund management companies have organized 16501 educational courses of lectures, released 14.34 million publicity pamphlets, published about 6000 investor education article and 2679 online resources guide. In the recent year, the program of investor education has been improved. In Feb 2008, SAC established a special investor education foundation to support the education projects. One security company has contributed 1 million RMB as the initial assets. Since 2008, the investors have been suffering losing of fund assets attribute to the stock market fluctuation, SAC has shifted its focus from essential investment knowledge introduction to financial principles and investment techniques understand. So a new brochure has been released to help investors understand their own financial circumstances, better understand markets, the fund management companies and the techniques to invest. In order to provide sound investment information on QDII, the brochure of QDII Investment was published too. Notice on rights for fund invests was issued in Aug 2008, which was supposed to reach all of new investors. 22 nd IIFA Annual Meeting Montreal Oct 2008 9