KPMG FISE cutting through complexity FINANCIAL SERVICES Chinas Capital arkets The changing landscape kpmg. com/cn
FINANCIAL SERVICES China’s Capital Markets The changing landscape kpmg.com/cn
2 | Section or Brochure name © 2011 KPMG, a Hong Kong partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. © 2011 KPMG, a Hong Kong partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 2 | China’s Capital Markets - The changing landscape
Chinas Capital Markets-The changing landscape 1 Contents Executive summary Equity markets The changing investor landscape Regulatory changes Case study 14 William Kwok, Ping An Securities Bond mark Trading in bond markets Development of the credit rating industry in China Recent innovations Openness and enhancement 24 Sandra Lu llinks law firm Derivatives markets Peter Zhang, China Banking Regulatory Commission Outlook for the next decade 29 Registration and tax guide Glossary of terms About FTSE About d About KPmg 0 2011 KPMG, a Hong Kong partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG international"), a Swiss entity. All rights reserved
Contents 2 3 5 14 15 24 25 28 29 31 32 33 34 35 36 Introduction Executive summary Equity markets - The changing investor landscape - Recent innovations - Regulatory changes Case study - William Kwok, Ping An Securities Bond markets - Trading in bond markets - Development of the credit rating industry in China - Recent innovations - Openness and enhancement Case study - Sandra Lu, LLinks Law Firm Derivatives markets Case study - Peter Zhang, China Banking Regulatory Commission Outlook for the next decade Appendix - Registration and tax guidelines for QFIIs Glossary of terms About FTSE About Dagong About KPMG Contact us © 2011 KPMG, a Hong Kong partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. © 2011 KPMG, a Hong Kong partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. China’s Capital Markets - The changing landscape | 1
2 China's Capital Markets-The changing landscape Introduction At the time of our last capital markets report in 2007, China was riding an unprecedented bull market. Since then, stock markets have been destabilised by the global financial crisis and equity valuations have still yet to recover to the peaks of that time Nevertheless, in absolute size China' s equities markets have now grown to a significant level, from USD 400 billion in 2005, to USD 4 trillion in 2010. This grow has been fuelled by more than 500 initial public offerings, including the listings of Chinas largest banks. Shanghai now has some of the world's largest companies Simon gleave represented on its bourse artner in Chat As the global financial crisis is consigned to history, longer term factors are Financial services KPMG China now coming into play. With pricing remaining a concern, and few large unlisted companies left to sustain the IPo boom, attention is turning to China s plans for capital account liberalisation and the potential implications for the future development of equities, bonds and derivative products Over the past three years several new products and innovations have been introduced and the market response has in many cases been dramatic. We can see that when the government and regulatory authorities act, things can happen quickly and any would-be investor needs to be committed and ready to act to take advantage of the opening up of different asset classes A lot has changed, but China is still a young market with huge potential for further growth in all asset classes Donald Keith Deputy ceo FTSE Group 0 2011 KPMG, a Hong Kong partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG international"), a Swiss entity. All rights reserved
Introduction At the time of our last capital markets report in 2007, China was riding an unprecedented bull market. Since then, stock markets have been destabilised by the global financial crisis and equity valuations have still yet to recover to the peaks of that time. Nevertheless, in absolute size China’s equities markets have now grown to a significant level, from USD 400 billion in 2005, to USD 4 trillion in 2010. This growth has been fuelled by more than 500 initial public offerings, including the listings of China’s largest banks. Shanghai now has some of the world’s largest companies represented on its bourse. As the global financial crisis is consigned to history, longer term factors are now coming into play. With pricing remaining a concern, and few large unlisted companies left to sustain the IPO boom, attention is turning to China’s plans for capital account liberalisation and the potential implications for the future development of equities, bonds and derivative products. Over the past three years several new products and innovations have been introduced and the market response has in many cases been dramatic. We can see that when the government and regulatory authorities act, things can happen quickly and any would-be investor needs to be committed and ready to act to take advantage of the opening up of different asset classes. A lot has changed, but China is still a young market with huge potential for further growth in all asset classes. Simon Gleave Partner in Charge Financial Services KPMG China Donald Keith Deputy CEO FTSE Group © 2011 KPMG, a Hong Kong partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. © 2011 KPMG, a Hong Kong partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 2 | China’s Capital Markets - The changing landscape
China's Capital Markets -The changing landscape 3 Executive summary Chinas total stock market capitalisation has risen more than tenfold in the past six years to USD 4.2 trillion at the end of Q1 2011. While preparations for the long-awaited International Board are underway, the formal introduction of chiNext and of stock Index Futures has broadened the market for both domestic and overseas investors The equity market has been evolving and growing towards a more even mix of investor classes, with institutions such as investment funds pension funds, insurance companies, corporates, sovereign wealth funds and Qualified Foreign Institutional Investors(QFlls) playing a more pr nt role Despite their relatively small market share, QFlls important in China s equity market in terms of enhancing fundamental esearch and market sophistication. As the QFl pool keeps growing, the Iq nd to USD 30 billion before long The recent development of offshore renminbi business in Hong Kong marks the beginning of a new stage in the promotion and internationalisation of the Chinese currency in offshore markets. While Shanghai looks set to emerge as a global financial centre in its own right, the financial cooperation between Hong Kong and Shanghai will continue to strengthen through further cross-border investments and dual/ cross-listing of shares, ETFs and other securities in both markets Although China s corporate sector remains highly dependent on bank financing there is growing interest in corporate bonds. We expect this growth to continue, particularly if there is further tightening of the bank and regulatory environment While many financial products are in their infancy, the growth in the market for stock index futures shows the level of pent-up demand and how new products can emerge and soak up demand once approved and successfully launched Acknowledgements This report would not have been possible without the generous insights of FTSE Group (equities section) and Dagong Global Credit (bonds section) Contributors: Stuart Leckie and Yuri Zhou, Stirling Finance: Jessie Pak and FTSE Group, Jialin Chen, Dagong Global Credit, Chris arshall and Hong Chen, KPMG China Editor: Mike Hurle. KPMG China Design: Pui Lam Chan, KPMG China 0 2011 KPMG, a Hong Kong partnership and a member firm of the KPMG network of independent member firms affiated with KPMG Intemational Cooperatie ( KPMG International ), a Swiss entity. All rights reserved
Executive summary Acknowledgements This report would not have been possible without the generous insights of FTSE Group (equities section) and Dagong Global Credit (bonds section). Contributors: Stuart Leckie and Yuri Zhou, Stirling Finance; Jessie Pak and FTSE Group, Jialin Chen, Dagong Global Credit, Chris Marshall and Hong Chen, KPMG China. Editor: Mike Hurle, KPMG China Design: Pui Lam Chan, KPMG China China’s total stock market capitalisation has risen more than tenfold in the past six years to USD 4.2 trillion at the end of Q1 2011. While preparations for the long-awaited International Board are underway, the formal introduction of ChiNext and of Stock Index Futures has broadened the market for both domestic and overseas investors. The equity market has been evolving and growing towards a more even mix of investor classes, with institutions such as investment funds, pension funds, insurance companies, corporates, sovereign wealth funds and Qualified Foreign Institutional Investors (QFIIs) playing a more prominent role. Despite their relatively small market share, QFIIs are increasingly important in China’s equity market in terms of enhancing fundamental research and market sophistication. As the QFII pool keeps growing, the total quota is expected to expand to USD 30 billion before long. The recent development of offshore renminbi business in Hong Kong marks the beginning of a new stage in the promotion and internationalisation of the Chinese currency in offshore markets. While Shanghai looks set to emerge as a global financial centre in its own right, the financial cooperation between Hong Kong and Shanghai will continue to strengthen through further cross-border investments and dual / cross-listing of shares, ETFs and other securities in both markets. Although China’s corporate sector remains highly dependent on bank financing, there is growing interest in corporate bonds. We expect this growth to continue, particularly if there is further tightening of the bank and regulatory environment. While many financial products are in their infancy, the growth in the market for stock index futures shows the level of pent-up demand and how new products can emerge and soak up demand once approved and successfully launched. © 2011 KPMG, a Hong Kong partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. © 2011 KPMG, a Hong Kong partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. China’s Capital Markets - The changing landscape | 3