Integration between China's Offshore and Onshore Equity Markets
Integration between China's Offshore and Onshore Equity Markets
Integration between China's Offshore and Onshore Equity Markets
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Goldman Sachs – Asia Trading Conference<br />
<strong>Integration</strong> <strong>between</strong> China’s<br />
<strong>Offshore</strong> <strong>and</strong> <strong>Onshore</strong> <strong>Equity</strong> <strong>Markets</strong><br />
Recent <strong>and</strong> Future Trends<br />
6 February 2013
Evolution of China’s Growth Story<br />
1990 2000<br />
2010 2020<br />
Raising Capital<br />
Commercialisation of SOEs <strong>and</strong> Improved<br />
Governance<br />
Rapid<br />
Growth<br />
Private Enterprise Growth<br />
Slowing Growth/<br />
Restructuring<br />
Capital<br />
Import<br />
International Listings<br />
Internationalisation of RMB<br />
Capital<br />
Export<br />
Commercialisation<br />
Commodity Market Opens Up<br />
Risk<br />
Management<br />
Cash <strong>Equity</strong><br />
Exchange Rate/Interest Rate Reform<br />
Derivatives<br />
Internationalisation of China Capital<br />
<strong>Markets</strong><br />
Diversification of Domestic Investors<br />
2
Evolution of Cross-Border <strong>Integration</strong><br />
Issuers<br />
A+H Shares<br />
Institutional<br />
Quotas<br />
QFII / QDII<br />
Proxy<br />
Products<br />
ETFs / RQFII<br />
Individual<br />
Flows<br />
QFII2 / QDII2<br />
RMB Internationalisation<br />
RMB internationalisation is both an enabler <strong>and</strong> indicator of China’s capital account opening up<br />
3
<strong>Onshore</strong> RMB<br />
Development of <strong>Offshore</strong> RMB Centre<br />
Banks<br />
20K / day<br />
conversion<br />
Mainl<strong>and</strong><br />
Interbank<br />
Market<br />
Banks<br />
Banks<br />
HK<br />
Individuals<br />
RQFII<br />
Issuers of RMB-<br />
Denominated Products<br />
RMB FDI<br />
QDII<br />
(Individual)<br />
Bond<br />
<strong>Equity</strong><br />
CNH<br />
Interest<br />
Rate / FX<br />
Products<br />
Commodities<br />
Derivatives<br />
Trade<br />
Settlement<br />
Trading<br />
Companies<br />
Producers/<br />
Consumers<br />
<strong>Offshore</strong> RMB products are key for sustained growth of RMB market<br />
4
<strong>Integration</strong> Timeline<br />
1990<br />
2000<br />
2010 2020<br />
15/07/1993 31/12/2012<br />
A + H Shares<br />
1 st H-share Listing<br />
Tsing Tao Brewery Co Ltd. (SEHK: 168)<br />
Funds Raised: US$114mil<br />
Follow on funds raised: US$103mil<br />
2002<br />
QFII<br />
Total Listed: 81<br />
Total Mkt Cap: US$2tri<br />
Initial Quota: US$4bn<br />
Approved Quota: US$37bn<br />
No. Companies: 169<br />
2006<br />
QDII<br />
Initial Quota: US$14.7bn<br />
Approved Quota: US$86bn<br />
No. Companies: 107<br />
17/07/2012<br />
Initial Approved Quota: US$3bn<br />
1 st ETF Listing: China AMCSI300<br />
(SEHK: 83188)<br />
RQFII<br />
Approved Quota: US$11bn<br />
No ETFs Listed: 4<br />
(Dual Counter)<br />
Turnover: US$6bn<br />
Source: HKEx; Citi – China QFII Market Update (4 th Quarter 2012); SAFE 5
Potential Impact of Cross - Border Flows<br />
Velocity of Major Global Exchanges<br />
U.S. / Europe<br />
Mainl<strong>and</strong> / Hong Kong –<br />
ADT & Velocity<br />
Asia<br />
Bovespa 71%<br />
NASDAQ 201%<br />
NYSE 94%<br />
107%<br />
10.2<br />
213%<br />
9.8<br />
42%<br />
4.5<br />
ASX 70%<br />
KRX 138%<br />
SGX 50%<br />
TSE 101%<br />
TMX 66%<br />
TWSE 91%<br />
LSE Group 55%<br />
SHSE SZSE HKEX*<br />
NSE 45%<br />
= LTM Velocity, ADT - US$bn<br />
*Excludes structured products (Derivative Warrant, CBBC)<br />
HKEx has the potential to substantially increase velocity as China opens capital account<br />
Source: WFE, as of 31 December 2012<br />
6
Comparison of Exchanges - Liquidity <strong>and</strong> Market Structure<br />
HKEx<br />
SHSE / SZSE<br />
U.S.A<br />
(NASDAQ / NYSE)<br />
Listed<br />
Chinese<br />
Companies:<br />
721 2,472 165<br />
Investor<br />
Composition<br />
• 75% Institutional • 80% Retail Market • 80+% Institutional<br />
Liquidity<br />
Profile<br />
• Top 100 by Market<br />
Capitalisation<br />
• Retail focused<br />
names<br />
• Skewed to a few<br />
quality stocks<br />
Velocity<br />
Profile • 42% • 107% / 213% • 201% / 94%<br />
Settlement<br />
Cycle<br />
• T+2 • T+0 • T+3<br />
7
Liquidity <strong>and</strong> Market Structure – HKEx<br />
HKEx<br />
Market Structure<br />
Listed Chinese Companies: 721; Total Listed Companies: 1,553<br />
Company ADT A-Share ADT<br />
Mkt. Cap<br />
Rank<br />
• T+2 trading<br />
CCB 198 21 3<br />
ICBC 187 28 5<br />
China Mobile 181 – 1<br />
AIA 167 – 8<br />
HSBC 137 – 2<br />
BOC 128 11 12<br />
CNOOC 109 – 4<br />
Tencent 104 – 6<br />
• Prime brokerage <strong>and</strong> margin<br />
trading<br />
• Covered short selling<br />
• Leverage via structured<br />
products<br />
• Full equity derivatives suite<br />
China Life 98 37 25<br />
Ping An Insurance 97 141 21<br />
Top 10 comprise 28% of Total ADT<br />
ADT data for Jan-Dec 2012 (US$mil); mkt cap rank as of 31 January 2013 8
Liquidity <strong>and</strong> Market Structure – Mainl<strong>and</strong> China<br />
SHSE<br />
SZSE<br />
Market Structure<br />
Listed Companies: 944<br />
Listed Companies:1,528<br />
Company<br />
Baotou Steel<br />
Rare Earth<br />
Ping An<br />
Insurance<br />
CITIC<br />
Securities<br />
Kweichow<br />
Moutai<br />
Minsheng<br />
Banking<br />
ADT<br />
H-<br />
Share<br />
ADT<br />
Mkt.<br />
Cap<br />
Rank<br />
306 – 28<br />
141 97 11<br />
Company<br />
Wuliangye<br />
Yibin<br />
Zhong Ke San<br />
Huan<br />
ADT<br />
H-<br />
Share<br />
ADT<br />
Mkt.<br />
Cap<br />
Rank<br />
148 – 2<br />
127 – 47<br />
135 18 17 China Vanke 94 – 1<br />
108 – 15<br />
Industrial Bank 102 – 8<br />
Pudong Dev<br />
Bank<br />
China<br />
Merchants Bank<br />
Haitong<br />
Securities<br />
Baotou Steel<br />
Union<br />
Suning<br />
Appliance<br />
90 – 11<br />
106 34 10 Zoomlion 83 26 5<br />
Seal<strong>and</strong><br />
Securities<br />
77 – 162<br />
91 – 12 Jiugui Liquor 76 – 156<br />
89 33 9 GF Securities 74 – 12<br />
88 15 23<br />
77 – 72<br />
Pangang<br />
Group<br />
China<br />
Nonferrous<br />
Metal<br />
62 – 41<br />
60 – 60<br />
• T+0 trading<br />
• Restricted margin trading<br />
<strong>and</strong> short selling<br />
• No prime brokerage<br />
• Intraday trading not allowed<br />
• CSI 300 index futures only<br />
Top 10 comprise 11% of Total ADT<br />
Top 10 comprise 7% of Total ADT<br />
ADT data for Jan-Dec 2012 (US$mil); mkt cap rank as of 31 January 2013<br />
9
Liquidity <strong>and</strong> Market Structure – U.S.A.<br />
U.S. Listed Chinese Stocks<br />
Market Structure<br />
Listed Chinese Companies: 165 (NASDAQ + NYSE)<br />
Company<br />
ADT<br />
• T+3 trading<br />
Baidu 628<br />
Sina 208<br />
Ctrip.Com 58<br />
New Oriental Education & Tech. 44<br />
Sohu.com 43<br />
Youku Tudou 43<br />
Qihoo 360 Tech 42<br />
• Fragmented marketplace<br />
• Lack of quality issuers<br />
• Corporate governance<br />
issues<br />
• Full equity options market<br />
NetEase 40<br />
Renren 29<br />
Spreadtrum Com. 19<br />
Top 10 comprise 79% of Total ADT<br />
ADT data for Jan-Dec 2012 (US$mil) 10
<strong>Equity</strong> Derivatives - HKEx has Significant Competitive<br />
Advantage vs. Mainl<strong>and</strong> Exchanges<br />
HKEx<br />
Mainl<strong>and</strong> Exchanges<br />
CBBC’s<br />
Derivatives Warrants<br />
Single<br />
Stock<br />
Indices<br />
Stock Options &<br />
Futures<br />
HSI Options &<br />
Futures<br />
H-share Index<br />
Options <strong>and</strong> Futures<br />
Dividend & VIX<br />
Futures<br />
BRICS Futures<br />
A-share Futures (JV<br />
with SHSE <strong>and</strong> SZSE)<br />
CSI 300<br />
• Only 100,000 “qualified” CFFEX<br />
investors vs. 100 million equity<br />
investors…<br />
• … Yet the world’s most successful<br />
equity futures contract by trading<br />
volume<br />
11
<strong>Offshore</strong> Joint Venture - With Shanghai <strong>and</strong> Shenzhen<br />
Stock Exchanges<br />
Exp<strong>and</strong>s HKEx product suite on China underlying:<br />
Single<br />
Stock<br />
HSI Index<br />
H-share<br />
Index<br />
Flagship<br />
Cross-Market<br />
China Indices<br />
A-share<br />
Index<br />
Index<br />
Futures<br />
Index<br />
Options<br />
DWs /<br />
CBBC’s<br />
RQFII<br />
ETFs<br />
Mainl<strong>and</strong><br />
ETFs<br />
Facilitates A-share futures <strong>and</strong> development of flagship China indices<br />
12
What’s Next…<br />
A-Share<br />
Futures<br />
QDII2 / QFII2<br />
Connectivity<br />
Existing today:<br />
• SGX: FTSE China A50<br />
• CFFEX: CSI300<br />
• HKEx: RQFII ETF<br />
Options (2822, 2823)<br />
Coming Soon?<br />
• CES Benchmarks<br />
• HKEx: China 80<br />
Futures<br />
• Who will be the<br />
investor base?<br />
• What products will be<br />
launched?<br />
• When will it be<br />
implemented?<br />
• How will the quotas<br />
grow over time?<br />
• A + H share Fungibility<br />
• Cross Listing?<br />
• Order Routing?<br />
• Clearing Cooperation?<br />
13
Appendices<br />
14
<strong>Offshore</strong> RMB Development<br />
Policies Unfolded Rapidly<br />
2004 2007 2009 2010 2011 2012<br />
Individual<br />
RMB<br />
Business<br />
• RMB deposit-taking<br />
• Cheque<br />
• Credit / debit card<br />
• Remittance services<br />
RMB Bond<br />
Market<br />
• 1 st RMB bonds<br />
Mainl<strong>and</strong><br />
financial<br />
institution :<br />
CDB<br />
• 1 st RMB<br />
sovereign<br />
bond (MOF)<br />
• 1 st RMB bond<br />
Overseas<br />
corporate:<br />
McDonald<br />
• 1 st RMB bond<br />
Non-financial<br />
Mainl<strong>and</strong><br />
institution:<br />
Baosteel<br />
RMB Trade<br />
Settlement<br />
• Pilot scheme<br />
5 mainl<strong>and</strong><br />
cities<br />
• Expansion<br />
20 provinces<br />
<strong>and</strong> cities<br />
• Expansion<br />
Nationwide<br />
RMB<br />
Investment<br />
• RQFII Launch<br />
Initial quota:<br />
RMB20bn<br />
• RMB ODI <strong>and</strong><br />
RMB FDI<br />
• RQFII expansion<br />
Quota: RMB50bn<br />
• RQFII A-share<br />
ETF scheme<br />
15
RMB Capability – Laying the Foundation<br />
Oct 2010<br />
Apr 2011<br />
Jan 2012<br />
July 2012<br />
July 2012<br />
Oct 2012<br />
Listed first RMB<br />
bond<br />
Listed first RMB<br />
REIT<br />
RMB Trading<br />
Support Facility<br />
(TSF) ready<br />
Listed first MOF<br />
RMB bond of<br />
RMB 23bn<br />
TSF extended to<br />
include RMB<br />
ETFs <strong>and</strong> REITs<br />
First RMB followon<br />
using Dual<br />
Counter model –<br />
Hopewell<br />
Highway<br />
Infrastructure<br />
2010<br />
2011 2012<br />
. . .<br />
Oct Jan Apr Jul Oct Jan<br />
Apr<br />
Jul<br />
Oct<br />
Mar 2011<br />
Sep 2011<br />
Feb 2012<br />
July 2012<br />
Sep 2012<br />
Dec 2012<br />
Conducted RMB<br />
readiness testing<br />
with participants<br />
Introduced Dual<br />
Tranche, Dual<br />
Counter (DTDC)<br />
- RMB equity<br />
issuance model<br />
to the market<br />
Listed first RMB<br />
Gold ETF<br />
Listed first RQFII<br />
A-share ETF<br />
based on CSI<br />
300 Index<br />
First RMB<br />
currency futures<br />
traded<br />
Listed first RMB<br />
derivative warrant<br />
16
Comparison of A & H Shares for A+H Stocks<br />
MC Rank 1<br />
(A+H shares)<br />
A + H<br />
Mkt Cap*<br />
(US$mil)<br />
Company<br />
H shares<br />
Mkt Cap*<br />
(US$mil)<br />
MC Rank 2<br />
(all HK stks)<br />
ADT^<br />
(US$mil)<br />
% of A+H<br />
ADT<br />
Listed<br />
Ex<br />
A shares<br />
ADT^<br />
(US$mil)<br />
H-share Price*<br />
Premium /<br />
Discount<br />
1 265,009 PETROCHINA 29,936 18 91 84% SH 18 -2.32%<br />
2 246,317 ICBC 65,044 6 187 89% SH 23 7.97%<br />
3 209,514 CCB 202,188 2 198 92% SH 17 9.19%<br />
4 150,202 ABC 15,939 42 58 71% SH 24 11.94%<br />
5 133,584 BANK OF CHINA 39,908 13 128 93% SH 9 -0.39%<br />
6 99,974 SINOPEC CORP 19,913 32 76 75% SH 26 3.67%<br />
7 98,724 CHINA LIFE 25,675 24 98 77% SH 29 -1.67%<br />
8 80,677 CHINA SHENHUA 14,554 47 62 62% SH 38 6.37%<br />
9 63,882 PING AN 27,814 21 97 46% SH 113 15.21%<br />
10 60,030 BANKCOMM 28,225 20 21 42% SH 29 -0.51%<br />
11 48,418 CM BANK 9,109 63 33 32% SH 71 4.48%<br />
12 38.397 MINSHENG BANK 7,348 77 34 29% SH 85 -8.08%<br />
13 34,111 CPIC 11,258 55 37 45% SH 45 10.39%<br />
14 31,597 CITIC BANK 9,693 62 22 69% SH 10 -5.39%<br />
15 24,559 CITIC SEC 3,062 147 18 15% SH 108 15.94%<br />
16 16,474 ANHUI CONCH 4,694 97 44 43% SH 58 18.45%<br />
17 16,194 CHINA COAL 4,688 99 27 70% SH 12 -10.14%<br />
18 15,916 HAITONG SEC 2,568 169 15 17% SH 71 4.13%<br />
19 14,464 HUANENG POWER 3,187 141 15 54% SH 13 -19.80%<br />
20 14,268 CHINA COMM CONS 4,466 106 17 42% SH 24 17.28%<br />
21 13,717 NEW CHINA LIFE 4,288 112 10 34% SH 20 -9.02%<br />
22 13,062 CHINA RAIL CONS 2,520 170 14 50% SH 13 15.36%<br />
23 12,175 JIANGXI COPPER 3,821 126 30 45% SH 36 -46.19%<br />
24 12,151 ZIJIN MINING 2,394 176 16 33% SH 32 -54.90%<br />
25 12,094 GREAT WALL MOTOR 3,824 125 15 58% SH 11 -11.18%<br />
Top 25 1,725,511 546,120 1,362 59% 934 (Med) 3.67%<br />
All A+H (81) 1,963,283 604,597 1,670 55% 1,357 (Med) -14.50%<br />
* Market capitalisation <strong>and</strong> stock price are as at the end of 14 January 2013. H-share price premium/discount is relative to H-share price.<br />
^ Average daily turnover is for Jan-Dec 2012<br />
17
Cross-border Product Facilitation - CES Indices<br />
HKEx-listed Mainl<strong>and</strong> Stocks<br />
The CES China Index<br />
SSE / SZSE-listed A shares<br />
CES China 120 Index<br />
(launched on 10 December 2012)<br />
Anticipating closer correlation<br />
in performance of Mainl<strong>and</strong><br />
stocks listed on China<br />
exchanges<br />
CESC expects the crossborder<br />
equity index to serve<br />
as an indicator of equity<br />
market development in<br />
upcoming years<br />
CES China HK<br />
Mainl<strong>and</strong> Index<br />
CES China A80 Index<br />
CESC will develop other<br />
indices that measure the<br />
performance of Mainl<strong>and</strong><br />
stocks listed on the three<br />
exchanges<br />
An index that comprises listings from HKEx, Shanghai Stock Exchange <strong>and</strong><br />
Shenzhen Stock Exchange is a natural starting point for CESC<br />
18
CES120 - Constituents Summary<br />
Item<br />
Value<br />
Number of Constituents 120<br />
Index Free Float Market Capitalisation (CNY Bn) 6,166<br />
Largest Market Capitalisation (CNY Bn) 452<br />
Smallest Market Capitalisation (CNY Bn) 3.5<br />
Average Market Capitalisation (CNY Bn) 51.4<br />
Weight of Largest Constituent (%) 7.3<br />
Weighting Breakdown<br />
Sector Breakdown<br />
SSE A-shares<br />
(64)<br />
36%<br />
SZSE A-shares<br />
(16)<br />
8%<br />
Tele Services<br />
(5)<br />
9%<br />
IT (2)<br />
4%<br />
Utilities (6)<br />
2%<br />
Energy (16)<br />
15%<br />
Materials (12)<br />
4%<br />
Industrials (20)<br />
6%<br />
Source: CSI Data as at 31 October 2012<br />
Hong Kong<br />
Mainl<strong>and</strong><br />
Stocks (40)<br />
56%<br />
Financials (41)<br />
49%<br />
Consumer Disc<br />
(9)<br />
4%<br />
Consumer (9)<br />
Stap<br />
7%<br />
19
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