Cross-Border Updates: Quarterly Assessment December 2014 Evolving First show Multi-hub Connect The speed and scale of RQFII s global expansion should have spurred global managers to strategize their RQFII investments from multiple global locations. This makes the ability to leverage strategies across different hubs essential. Total quota usage is expected to surpass 80% by the end of 1Q15, particularly if MSCI reweights A-shares. Z-Ben Advisors expects the increase of quota cap to be undertaken before 2Q15 either incrementally or asa one-off injection. Further expansion Aggressive acquirers RQDII Insurers The RMB Qualified Domestic Institutional Investor (RQDII) program allows onshore RMB holders to invest in offshore RMB denominated products. It also demonstrates the Government s ambition to push RMB internationalization. With offshore investment increasing, large and mid-tier insurance companies have shown an interest in offshore real estate acquisitions. Given current low offshore exposure by insurers, we expect the pace to increase in 2015. Cross-border quarterly Z-Ben Advisors www.z-ben.com 1
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) 哲奔投资管理咨询 ( 上海 ) 有限公司 Hongjia Tower, 25/F 388 Fushan Road Pudong New Area, Shanghai China 200122 +86 21 6075 8155 Disclaimer The contents of (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. Z-Ben Advisors www.z-ben.com 2
Table of content Inbound programs Inbound: Cross-border access channels 4 RQFII: HK quota shortage 5 RQFII: Going solo 6 RQFII: Ashmore case study 7 RQFII: Australia 8 RQFII: Canada 9 RQFII: Qatar 10 RQFII: Emerging hubs 11 RQFII: Multi-hub strategy 12 RQFII: Corporate treasury 13 RQFII/QFII: IBB license application 14 NDRC: Foreign investment easing 15 Futures: Opportunities for JVs 16 Outbound programs Outbound: Cross-border access 17 RQDII: An introduction 18 QDII: Overview 19 QDII: Servicing HNWIs 20 QDII: FMCs 21 QDII/RQFII: Round-trip leverage 22 QDLP: Quarterly update 23 Bi-lateral programs Bilateral: Cross-border access 24 The Connect: Northbound quota utilization 25 The Connect: Stock analysis 26 The Connect: Investor types (Southbound) 27 The Connect: Complementary usage 28 The Connect: Tax comparison 29 The Connect: Stock lending 30 The Connect: Imminent products (Southbound) 31 The Connect: Program expansion 32 Mutual Recognition: Qianhai bound 33 Mainland firms target HK licenses 34 European presence: BOC 35 European presence: ICBC 36 European presence: ABC 37 European presence: CCB 38 FTZ: Established entities 39 Qianhai: The next mainland center 40 WFOE: Historical overview 41 WFOE: Expansion strategy 42 Institutional capital trend Insurers: Mid-tiers global tilt 43 Insurers: ODI 44 EA: Foreign entry 45 NSSF: Winds of reform 46 Z-Ben Advisors www.z-ben.com 3
Inbound: Cross-border access Phase I (2003-2014.11.17) Phase II (2015-2020) Phase III (Beyond 2020) RMB tr 30 25 20 15 10 QFII Program started in 2003. The number of QFII quota holders increased from 12 in 2003, to 270 in 2014. The total QFII quota increased from USD5.73bn in 2003, to USD65.75bn in 2014. RQFII Since started in late 2011, it continues to attract attention with quota allocated across many global regions and financial centers. List of RQFII centers: HK: RMB270bn RMB20bn in 2011.12 RMB50bn in 2012.04 RMB200bn in 2012.12 UK: RMB80bn in 2013.10 Singapore: RMB50bn in 2013.10 France: RMB80bn in 2014.03 South Korea: RMB80bn in 2014.07 Germany: RMB80bn in 2014.07 Qatar: RMB35bn in 2014.11 Canada: RMB50bn in 2014.11 Australia: RMB50bn in 2014.11 Stock Connect The launch of the Connect will aid cross-border convergence as further clarification on key regulatory issues will occur as the program matures. The commencement of mutual recognition will likely push the Chinese MF industry to further develop and cooperate with global MF schemes. Mutual Recognition Program convergence is likely to begin with QFII and RQFII and extend to other programs such as the Connect and MR. 5 QFII RQFII 0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014e 2015e 2016e 2017e 2018e 2019e 2020e 2021e Source: Z-Ben Advisors QFII RQFII SC (North) (Northbound) MR (Inbound) Northbound) Following over ten years of inbound cross-border program development, the Shanghai-Hong Kong Stock Connect (the Connect) represents a major milestone in the opening of mainland capital markets particularly considering recent clarification on issues such as capital gains tax (CGT) and foreign ownership. Recent RQFII developments have seen the program expand to North America and the Middle East. The proposed SZ-HK Connect remains at the forefront of regulators minds and will be quickly implemented off the back of the Connect we expect MR to occur within a similar timeframe. Z-Ben Advisors expects all cross-border schemes will converge by 2020, as they will continue to overlap each other asthey develop and grow. Z-Ben Advisors www.z-ben.com 4
Currency exchange RQDII: An introduction Outbound The RMB Qualified Domestic Institutional Investor (RQDII) program allows onshore RMB holders to invest in offshore RMB denominated products and demonstrates the Government s ambition to further push RMB internationalization. The advantages of RQDII at the beginning of a pilot period may not be obvious for investors, since the channel s investment scope is likely to be limited. With the rapid expansion of offshore RMB pools, such as through RMB-denominated treasury bonds, RMB corporate bonds and RMB-denominated GDRs, investors will have a wider range of products to invest in, with a possible extension to other asset classes. RQDII program Potential foreign investment FMC Trusts Brokerage Onshore RMB fund Cross-border Offshore New RQDII channel RMB denominated products RQDII is currently limited to investible assets, as RMB internationalization expands, this limitation will be change. Offshore RMB Products Bonds Preferred Shares GDR/ADR Current major investment category: Offshore RMB-Denominated Bonds 316 (RMB bn) Insurers RMB products Bank Exchanged from USD/EUR/JPY denominated products Foreign Products Foreign currency denominated products Cash and equivalent The relatively high returns from domestic financial products keeps investors in the mainland markets. Traditional QDII channel Exchange rate exposure are the primary obstacles to this channel. Equity investment Fixed income investment Structured notes 20 18 Hkex LSE SGX Source: Z-Ben Advisors, Wind Z-Ben Advisors www.z-ben.com 18