Financial Services Focus Group Quarterly Update – Q4 2015

Published on 2016-01-22

In this report you will read some financial services developments and regulatory highlights from October to December 2015.

Financial regulatory reform continued during the final quarter of 2015, with the 5th Party Plenum in late October confirming the shift in focus from demand side to supply side economic and fiscal management.  Beijing is no longer seeking to boost consumer demand but to increase the quality and efficiency of supply as a path towards a leaner, greener economy.  Restructuring SOEs, cutting taxes, increasing financial supervision, and improving pension funding are key items on the supply-side wish list.

The PBOC (People’s Bank of China) continues to drive China’s financial liberalisation agenda under the auspices of the Central Bank’s Governor, Zhou Xiao Chuan, and during the 13th 5-Year Plan, is likely to take control of the three financial regulatory bodies, i.e. the CSRC (China Securities Regulatory Commission), CBRC (China Banking Regulatory Commission) and CIRC (China Insurance Regulatory Commission).  PBOC is determined to internationalise China’s financial system, whilst keen to play by global rules.

Financial Services Developments and Regulatory Highlights, Oct-Dec 2015:

13th 5-Year Plan:  The plan is expected to be formally launched March 2016 with a focus on reform of the financial regulatory architecture and online finance; microfinance will be targeted.  Sustainable development via ‘Green Finance” will be emphasised in specific regions along with the adoption of low-carbon technology and renewables to promote energy efficiency.  China’s MNCs will be encouraged to export their capital, equipment, technology, services and standards, developing their global business and financial reach.

Re-opening of A-share IPO Market:  In light of the recovery of the equities market and the view that it would be in the market’s interest to allow a supply of new shares for subscription, following a moratorium of several months, CSRC announced in November that it would be resuming the process of reviewing new A-share IPO applications that had previously been suspended.  The CSRC dropped a requirement that subscriptions to all IPOs be paid in advance, a rule that had helped systemically undervalue firms about to list on the Mainland. The effect almost guaranteed profit to those able to secure shares ahead of a company's debut.  The advance payment requirement had also heightened market volatility by forcing investors to divert otherwise productive capital and sell their holdings to raise funds for applications for inevitably over-subscribed IPOs, drying up liquidity in the days or weeks ahead of listings approved and scheduled by the CSRC.

A-Share Listing Reforms:  December 27, the NPC Standing Committee approved the State Council’s reform plan to accelerate the launching process for a registration-based IPO system to replace the current approval-based system.  The process will change from an IPO approval- to an IPO registration-basis.  Certain listing qualification requirements will be replaced with disclosure requirements underpinning reform of the pricing and underwriting process.  Also proposed are measures to disclose and redress the potential negative impact of IPOs and other transactions on shareholder returns.  Cleaning up measures for capital markets have been put in place ahead of the official launch on March 1, 2016.

MPA (macro-prudential assessment framework):  In late December, PBOC announced it will replace its current financial system management tools, i.e. a dynamic adjustment mechanism for reserve requirements and a management mechanism for desirable loans to industries needing capital, with the MPA from 2016. The former system of management has been in place since 2011.

Tax - R&D Expenditures Enjoying "Super Deductions" Expanded:  At present, 150% of R&D expenses can be deducted from company income, reducing the total tax burden. IP costs and costs of external R&D personnel are also tax deductible.  In addition, 3 years of past R&D expenses can be retroactively claimed for 150% tax deduction.

Prudential Requirements for Chinese Commercial Banks:  October saw the removal of the legal requirement for Chinese commercial banks to observe a maximum loan to deposit ratio (previously 75%).

Foreign Direct Investment:  MOFCOM continued to revise the rules governing foreign invested enterprises in China, eliminating rules requiring a minimum registered capital or a minimum proportion of capital paid up in cash for the VC and financial leasing sectors, as well as removal of paid-up capital as a condition of entry into a wide range of key transactions.  

RQFII (RMB Qualified Foreign Institutional Investor):  PBOC the scheme to Sweden, Luxembourg, Chile, Hungary, Malaysia and Thailand.  Quotas have been issued to more than 170 institutions across 13 hubs including Hong Kong, Singapore and London.

IMF Special Drawing Rights:  In November, the IMF announced that the RMB had been approved for inclusion in the basket of currencies making up the Special Drawing Rights from Oct 1, 2016.  SDR inclusion will in the long run boost the global market's demand for yuan-based assets, which in turn should beef up the currency's value over time.  Inclusion should bring faster progress with reform of China’s exchange rate regime, capital account system, monetary policy and financial markets supervision.

AIIB:  The China-led Asian Infrastructure Investment Bank (AIIB) officially opened its doors in Beijing as it prepares to finance major infrastructure projects in Asia to help bridge the current infrastructure funding gap in Asia.  The Philippines was the last of the 57 countries and regions to sign up as a founding member before the 31 December deadline.  The AIIB legally came into existence on December 25 and will hold its first meeting on January 16, 2016.

Corporate Debt and Bad Loans:  Growth at China’s largest banks has fallen to its slowest pace since 2002.  Bad debt across the banking system is building up.  Bad loans have climbed the fastest among state-owned banks, which include some of the nation’s largest.  Meanwhile, provisioning coverage has been falling across bank categories as bad loans rise.  Whilst Beijing requires banks to keep the ratio at a minimum of 150%, and banks are still well above this threshold, the numbers imply that the system’s defenses are not keeping pace with the growth of these problems.  Analysts flag a rising bubble in corporate bonds, which in the first 11 months of this year reached 5.2 trillion yuan ($812 billion), up 39% from a year earlier to their highest level on record.  Corporate bonds have grown at a pace that dwarfs all other types of bonds, with the result that 2015 has already produced a record number of defaults by Chinese corporations.

Capital Adequacy Under Pressure:  Capital adequacy, a crisis-prevention regulatory measurement that flags how much equity a bank must hold as a percentage of risk-weighted assets, has fallen yet still remains higher than at the start of 2014.  China’s smaller banks now have less capital adequacy than they did two years ago.