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Country Profile: China's securities finance market

09 March 2017

Although Shanghai and Shenzhen have widened the availability of stocks, securities lending is at a very early stage in China

Issues to consider include how quickly bonds would be turned over and, from the regulator’s point of view, whether a withholding tax would be required. "Major CSDs in China already have the knowhow and systems and they are just waiting for the green light to jump start tri-party offerings in China," says Cheung.

Some participants in China fear the exchange rate and repo market is growing too big. New issues can be repo-ed immediately, which leaves the exchange holding market risk. "Obviously, based on international experience, products such as tri-party could mitigate market and credit risk if we look further into how the collateral is to be mobilised, eligibility criteria and the imposition of appropriate haircuts," adds Cheung.

Looking at China’s economy more broadly, there are increasing signs of corporate earnings and profitability improving. "With growth on track, policy has shifted towards a focus on risk control (e.g. the property market, leverage, non-performing loans (NPLs), and capital outflows). The government will likely also focus on tax reduction and state-owned enterprises (SOE) mixedownership reform. Southbound flows could cushion the downside risk for MSCI China amid higher RMB volatility, although higher US rates tend to dampen EM inflows," HSBC analysts said in an investment outlook in February.

"We think China’s structural economic challenges remain largely unsolved. Policymakers also face the dilemma between curbing the risk of property bubbles in selected cities while supporting the property sector as a key growth stabiliser."

ICBC Standard Bank: Expect eye on repo

China is a huge financial market and home to some of the largest credit institutions in the world, with future developments that are set to open up the financing market even further. Noticeably, many Chinese onshore assets are utilised in repo transactions, conducted out of Hong Kong and other neighbouring jurisdictions.

At present, the legal opinion for repo conducted within China is not clear, which means that bespoke legal advice is required prior to entering into global master repurchase agreements (GMRA) with domestic players.

Iain Colquhoun, Head of Corporate & Bank Flow Sales, ICBC Standard Bank, comments: "The Chinese market shows enormous potential but it is clear that a good deal of this potential is currently restricted from global participation. At ICBC Standard Bank we are able to provide a good link into the mainland and welcome discussions with international participants who may look to deploy resources in this area."


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