Financial Services Focus Group Quarterly Update – Q2 2016

Published on 2016-07-12

Whilst the weakness of the pound and projects to slash corporate taxes can make the United-Kingdom appear more attractive, the uncertainty over European passports and more generally trade agreements will probably affect investment decisions

On the 23 June, the United-Kingdom voted to exit the European-Union with a result of 52% to 48%. Detail of the vote showed sharp divisions amongst voters based on their age, education and region of living. The vote outcome, that triggered David Cameron’s resignation as Prime Minister, sees the UK and the EU enter into a period of uncertainty. This is likely to go on as long as the nature of the future cooperation between the European Union and what was its second largest economy in Europe is not clarified. Consumer confidence in the UK dived the most since 1994 after the vote.

On the financial markets the main impacts so far have been the collapse of the Pound to a 31 year low versus the USD and an outflow from the UK that has affected the less liquid asset classes such as commercial property – with some of the largest open-ended funds in the sector, holding about GBP15bn, forced to suspend dealings.

Whilst the weakness of the pound and projects to slash corporate taxes can make the United-Kingdom appear more attractive, the uncertainty over European passports and more generally trade agreements will probably affect investment decisions in the short term, and possibly also in the medium-term as well.

China Economic Outlook

In the past 5 years there have been recurring debates between economists and analysts to determine whether China is on a “hard landing” or “soft landing” path. The discussions have been revived this quarter as a set of figures exhibited a momentum loss at the end of Q1 this year, with Industrial production growth of 6% down from 6.8% growth in March and missing consensus estimates of 6.5%. Retail sales were also down, with a pullback in car sales weighing on the figure. Private investment in fixed assets also posted the slowest growth since 2012. The growth in home sales that contrasted with other economic indicators, is not as such entirely positive, demonstrating as it does the relative inefficiency of the measures implemented to cool down the surge in home prices.

The end of the quarter saw worse than expected Exports drop on the year (-4.1%) and some rather low figures in terms of inflation that could make it easier for the People’s Bank Of China to find arguments to implement more stimulus.

In early July, the Chinese National Bureau of Statistics changed its GDP calculation methodology, which should lift slightly the expected number, but this probably won’t boost the confidence in the reporting methodology.

Nonetheless, with an annualised 6.7% GDP growth, China remains within the official target and is still growing significantly quicker than its Western counterparts.

If overcapacity in the industrial sector and tax burdens remain key causes of concern, there are still plenty of reasons for optimism. Predicted growth of the middle class is 117% by 2020, indicating an ongoing shift from a traditional savings culture to more consumption. The rapid development of services as part of GDP and the still rapid urbanisation rate are drivers for the argument that China’s landing will be a soft one.

New Insurance Exchange in Shanghai

China's first insurance exchange platform, the Shanghai Insurance Exchange, was officially launched in Shanghai on 12 June, 2016.  The Exchange has an initial registered capital of RMB2.235 billion (US$340 million) which was contributed by 91 companies, including the following insurance companies: China Life, PICC, Ping An, China Re, Anbang, Taiping and Taikang.  The establishment of the Shanghai Insurance Exchange is a significant implementation milestone for the “State Council’s Several Opinions on Accelerating the Development of the Modern Insurance Service Industry” paper published in August 2014.  The Exchange is expected to facilitate trading of insurance and insurance derivatives, with a focus on international reinsurance, shipping insurance, bidding for mega insurance transactions and special risk insurance.  According to a vice Chairman of the China Insurance Regulatory Commission, the Exchange is tasked with aligning local businesses with global insurance practices and diversifying channel risks outside of the domestic insurance market through capacity in the capital markets.

Beijing gives WFOE’s the go ahead to register as Private Fund Firms

China Securities Regulatory Commission (CSRC) announced on 30 June, the go ahead for Wholly Foreign-Owned Enterprises (WFOE) and joint ventures to register as private Funds. This progress has been made following discussions undertaken during the seventh China-Britain Economic and Financial Dialogue and in the seventh round of the China-US Strategic and Economic Dialogue. The first three foreign asset managers gaining this authorisation are Aberdeen, Bridgewater and Fidelity. The foreign asset managers benefiting from this new arrangement will be able to raise funds privately in China, invest in the onshore Chinese market and provide qualified investors an asset management service without involving cross-border capital flow.

To benefit from this new status, the foreign institutions should first register, offer proof that neither they nor their overseas shareholder have “major” supervision or judicial punishments in the past three years (so far, what is “major” remains unspecified). Overseas shareholders should also be licenced by a local financial supervision body that has signed a cooperation memorandum with the CSRC.

China expects this liberalisation to improve local industry quality standards and a greater diversification of institutional investors type in the capital market. Meanwhile the CSRC is turning more vigilant against domestic private fund managers with the aim of tackling illegal fundraising and shadow banking.

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