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How to LaunchArticle06 Dec 2021

How to Connect With Mainland China

China’s capital markets continue to pique the interest of international investors, but how do they access the market?

With a growing economy and population, supported by the local government’s interest in foreign investment, institutional investors around the world are taking notice of China like never before. China is one of the world’s largest stock markets with a value of over $10 trillion in 2020, according to Bloomberg. China’s bond market is the second  largest in the world by capitalization reaching nearly $20 trillion in 2020, according to the International Capital Markets Association. In recent years, China A-shares and bonds have been included in major indexes, which has led many investors to look for routes to accessing the mainland China market.

As part of its ongoing effort to open its capital markets, the Chinese government has created a number of programs to help foreign institutional investors access the mainland markets.

Understanding the Routes to Mainland China

While all of these programs are designed to support the same goal, each has its own nuances that institutional investors need to understand ahead of entering the market.

QFI

The Qualified Foreign Investor (QFI) program is an amalgamation of two previous programs - the Qualified Foreign Institutional Investor and RMB Qualified Foreign Institutional Investor - that enables international investors to directly access China’s capital markets to trade Renminbi denominated China A-Shares, bonds, futures, options, and investment funds.

To participate in the program, qualified international investors must apply for a QFI license from the China Securities & Regulatory Commission (CSRC) and register with State Administration of Foreign Exchange (SAFE).  When applying for a licence, qualified international investors must disclose their investment strategy and notify the CRSC before making any changes to the strategy after gaining approval.  Participants must also appoint a local mainland China custodian for the safekeeping of their assets.

Participants in the QFI program are subject to the regulations of the CRSC, SAFE, and People’s Bank of China (PBoC).

Stock Connect

Stock Connect is a program that gives investors in Hong Kong and mainland China mutual access to each other’s equity markets without the need for application for license from Chinese regulators.

The Northbound channel of Stock Connect allows Hong Kong and foreign investors to place trade orders with any China Connect Exchange Participant (CCEP) which is an exchange participant that is registered as a CCEP with the Stock Exchange of Hong Kong (SEHK) to purchase or sell eligible securities listed on the Shanghai Stock Exchange (SSE) and Shenzhen Stock Exchange (SZSE).

The price discovery and rules of the security’s home market, where trading and settlement occur, apply. This means that trading and clearing arrangements will be subject to the regulations of mainland China.

CIBM Direct

The China Interbank Bond Market (CIBM) represents over 90% of China’s onshore bonds and CIBM Direct allows  qualified non-mainland investorsto trade bond in the market.

To participate in the program qualified investors must register with the PBOC and open a special RMB account accordingly. Qualified investors are also required to open bond account and cash clearing account with the China Central Depository and Clearing Co. Ltd. and the Shanghai Clearing House.

Bond Connect

Bond Connect is a program that give institutional investors in Hong Kong and mainland China mutual access to each other’s bond markets.

The Northbound channel of Bond Connect provides international investors to access the CIBM by establishing a trading and settlement link between mainland China and Hong Kong financial infrastructure institutions. International investors transact directly with onshore Bond Connect Market Makers through an approved trading platform, such as Tradeweb or Bloomberg, and a Central Moneymarkets Unit (CMU) member as their custodian or sub-custodian in Hong Kong, which will open sub-accounts for Hong Kong and international investors. This is one of the key differences between Bond Connect and other access channels where investors are required to appoint a Bond Settlement Agent in China.

Bond Connect is regulated by the PBoC and HKMA. Bond Connect market participants will continue to be governed and protected by the relevant regulations and rules of the Hong Kong market. Cross-border trades executed through Bond Connect, however, must follow the relevant business rules of the CIBM market.

Ready to begin connect with China?

When looking to invest into mainland China, the first decision firms must make is which program to use. The connect programs offer quicker access to the markets, while the QFI and CIBM offer a wider array of investment options, such as derivatives and hedging trades. 

Once a decision is made on which route to take, here are the initial steps a firm can take to begin preparing access to mainland China.

Documentation

Begin by reviewing the fund’s prospectus and determining whether amendments are required. Does the fund prospectus allow the use of A-shares? What approvals might be needed to begin this process? Firms will need a thorough understanding of the Stock and Bond Connect general terms and conditions. For Special Segregated Accounts (SPSA), prepare the HKEX SPSA form. Bond Connect investors must submit market admission and account application documentations to Bond Connect Company Limited. Firms will also likely need a disclosure statement and broker tax documents prepared.

Evaluate Execution and Custody Solutions

Firms should assess service providers to determine the best solution for execution and custody. Will execution be electronic or high touch? How will the firm secure prime and synthetic access? Firms should also establish a RMB FX and funding arrangement with their custodian or broker.

Access Approved Trading Platform

Trading with an experienced Bond Connect Market Maker in China ensures that firms are kept up to date on the latest market issues. Firms should seek partners that have ongoing dialogues with regulators across multiple geographies and stakeholders.

Prepare Operations Teams

Firms should review operations and specific cut off times. Auto-settle support may be required by the custodian, so operations teams should thoroughly review the potential regional considerations that may arise from this need.

Accessing China remains complicated due to evolving regulatory considerations and operational nuances. Firms will want to evolve their China market access strategy and stay abreast of changes to the access schemes.

 

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