Subject: Letter From Shanghai No 554 - The regulatory glacier falls away
| For China watchers, and if you are reading this note you are, there was a major shift in the political and economic tectonic plates below Beijing yesterday. Firstly, following a decision made yesterday at a meeting of the Politbureau, the fifth plenary session of the 19th Central Committee of the Communist Party of China (CPC) will be held in Beijing from October 26th to 29th. As expected, the meeting will discuss and no doubt approve “proposals for formulating the 14th Five-Year (2021-2025) Plan for Economic and Social Development and future targets for 2035.” The process of the Five-Year Plan is a key element of China's governance system. Delivered every five years since 1953 it sets the direction and importantly the pace of change. Various government departments and state-owned industries will then attempt to act cohesively to deliver the policies. However the “future targets for 2035” have yet to be revealed and importantly where they will lie within the previous commitments to build a moderately prosperous society by 2021, and a modern socialist country by 2049, the 100th anniversary of the founding of the People's Republic.
Yet, for those watching China, sometimes it can appear to be moving glacially slow. However, published last weekend, the “The Measures for the Administration of Domestic Securities and Futures Investment by Qualified Foreign Institutional Investors and RMB Qualified Foreign Institutional Investors (“Measures”) and the Provisions on Issues Concerning the Implementation of the Measures for the Administration of Domestic Securities and Futures Investment by Qualified Foreign Institutional Investors and RMB Qualified Foreign Institutional Investors,” published jointly by the CSRC, the PBOC and SAFE, believe me, you are watching a very large part of that glacier fall away.
I have already seen various reports jump to conclusions and make assumptions that are well-intentioned but have lost sight of the document itself. So let me make a massive generalisation for you, the regulations regarding quotas and prohibitions on buying financial instruments in China as of 1st November have been significantly relaxed, and the access to RMB with which to buy these assets has been significantly increased.
Now, this is not yet all things for all men. Clearly, this would suit a foreign equity buyer, who using his newly found freedom could go to the appropriate Chinese bank, buy RMB denominated shares in say Ping An and pay in USD. In this sense, the new regulations provide an alternative to the HKEX sponsored Stock Connect and Bond Connect. But these are essentially cash transactions, there is no ongoing commitment between buyer and seller, and it is, for this reason, there has never been a Futures Connect. Although the new regulations allow futures to be bought and sold under the new regime it says nothing to the following on-going commitment between the broker/bank and the client. These regulations and their regulatory oversight have yet to be clarified. For the moment, the only way a client can participate directly on a Chinese commodity exchange is to open their own company in China, a WFOE, a wholly-owned foreign enterprise or trade via the fully transparent and regulated Overseas Intermediary route via brokers such as ourselves
Have a good day
John
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