China this week

Added 15th June 2015

China this week

AMAC cautions on Shenzhen market

The Asset Management Association of China reiterated warnings to asset managers about the ChiNext, a NASDAQ-type board of the Shenzhen Stock Exchange.

Valuations of companies on the Shenzhen exchange have soared as investors expect the Shenzhen-Hong Kong stock connect to launch this year.

The organisation said asset managers should encourage mature investment concepts, insist on liquidity and enhance risk management. 

Diversification inside the fund should strictly follow the "Double Maximum 10% Agreement". It states rules concerning single stock concentration: a fund should not hold stock of a single company that is worth more than 10% of the fund's net value and funds should not hold more than 10% of a single company.

AMAC also said China's fund managers should keep renewing their professional knowledge and skills to develop longterm investment plans.

Caixin, June 6

The CSRC is losing talent to the private sector

The most recent employee departures at the China Securities Regulatory Commission involved three senior officials who found private sector jobs at a private equity firm and at Alibaba Group.

In 2014, about 30 CSRC officials, both low-and high-ranking ones, left their positions, according to media estimates. Most of them went to work for private financial institutions such as mutual funds, investment banks and private equity firms.

The job-hopping by regulatory officials is not surprising as the country is pushing market reform to curb administrative powers, which could make government positions less attractive.

Some experts said there is a tendency for former officials to trade their status for profit as many of them have access to important government information and can still influence policymaking, which could result in unfair competition or even corruption.

According to CSRC regulations, officials above a certain level are forbidden to work for financial institutions for a period of three years after their resignation. But some non-executive positions at financial institutions are excluded from the regulation.

China Daily, June 8

A-share expansion still restricted despite international interest

On June 2, Vanguard Group announced their plan to include A-shares in their FTSE Emerging Markets ETF, becoming the first ETF in the US to include A-shares.

Goldman Sachs reported that the volume and market value of A-shares have risen to the highest and second highest, respectively, among global markets. 

However, there are still limits to the internationalisation of A-shares. 

The A-share quota is one example, as the QFII programme imposes restrictions on the amount of trading. When the Shenzhen-Hong Kong Stock Connect launches, the quota restriction will be even more burdensome. Recently there have been reports that the QFII and QDII quota approval may be canceled during the year. This is long overdue. 

Still another obstacle is regulatory issues. One example is about the ownership rights of the stocks, which are not as clear in China compared to many overseas markets. However, the authorities now have the Hong Kong Securities Clearing Company as the nominal holder for overseas investors in A-shares through the Shanghai-Hong Kong Stock Connect. Investors are also provided with an ownership certificate.

Until the regulators finalise all regulations, investors must be cautious in the market.

China Securities Journal, June 4

Shanghai, Shenzhen exchanges clarify bond regulations for private equity

The Shanghai and Shenzhen Stock Exchanges have announced supplementary regulations on the distribution of company bonds that clarify participation rules for private equity fund managers.

Qualified private equity fund managers are allowed to trade all bond-relevant products. This includes bonds of public companies, private company offerings, state-owned enterprise bonds, convertible bonds, treasury bonds, local treasury bonds and others.

About 9000 private equity fund managers in China have about 10,000 bond products, which is equivalent to over 2 trillion RMB ($322bn) in value, according to officials of the Shanghai Stock Exchange.

The supplementary regulations are expected to intensify the demand for bond investments, officials said.

China Securities Journal, June 6

The RMB will soon be included in SDR: China Minsheng Bank

 The IMF evaluates the structure and weigh of the Special Drawing Rights (SDR) every five years and the G7 have expressed interest in including the RMB in the SDR. 

Wen Bin, the chief researcher at China Minsheng Bank, confirmed that the inclusion of the RMB is likely in the near future, though he did question whether the RMB could meet the requirements. He explained that IMF imposed criteria that requires an SDR currency to be used freely and globally (the "free usable" or FU criterion) to a specified level, which depends on the currency's role in international trade and its level of acceptance in the foreign exchange market.

Wen stressed the difficulty of the emerging markets currency being recognized globally. He also pointed out that the IMF suggested using the alternative Reserve Asset Criterion (RAC) for the SDR basket selection instead of the FU criterion.

Five years ago, the RMB was considered but not included. Now, with the international growth of RMB, Wen is optimistic of its inclusion in the near future.

China Securities Journal, June 6

Who can supervise the Guru Club?

The "Guru Club", a mainland investment site, has earned a reputation for stock recommendations. For example, on 25/05/2015, Amber Energy was mentioned in a Guru Club article and it soared 80% the following day. 

The founder of the "Guru Club", Chen Shou-hong, is a licensed person registered with the Hong Kong Securities and Futures Commission. 

Chen has worked at several investment companies in Hong Kong, and was an employee at the Guosen Securities Asset Management, but resigned in May. Regulations prohibit unemployed licensed persons from distributing information on securities to the public.

However, Chen has published has published stock commentary using the pseudonym "Guru" which some consider a legal gray area. 

Some questions were raised about a potential conflict of interest as Chan acts as both licensed purchaser of securities and as a commentator. The SFC strictly forbids this kind of action, requiring the commentator to be an independent source of information. There are also regulations controlling the trading activities of stock commentators.

Caixin, June 3

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