China
13 Jun 2018
China is an ancient country with relatively young financial institutions. But with its regulation lagging behind its innovation, what is China’s asset servicing outlook?
Image: Shutterstock
Though China and US are in an ongoing, fluctuating spat surrounding trade deals which currently dominates headlines, away from the news anchor’s reach is the good progress they are making, creating innovative financial technology, though the government’s David and Goliath combat with financial crime slightly marrs this.
In the 1970s, China experienced an increase of urban workers into higher-paying jobs in cities. Eventually the Shanghai stock exchange was reopened in December 1990, which in turn led to China’s accession to the World Trade Organisation.
Skip forward to 2018, and the current Chinese president, Xi Jinping is attempting to improve the country’s economic prospects with an on-going five-year anti-corruption campaign.
Corruption is viewed as a serious issue in China. According to the Ministry of Public Security, Chinese police recovered RMB 35.6 billion ($5.4 billion) and closed 168,000 financial crime cases in 2016.
In 2017, The Chinese Securities Regulatory Commission announced administrative penalties of RMB 7.57 billion ($1.2 billion). So no surprise then that last November, the Chinese government launched a new ‘super regulator’, headed by vice-premier Ma Kai.
The agency will reportedly assist the government with regulation and initiate policies on China’s financial security.
China still faces issues with its financial regulation and, under Jinping’s guidance, seems to be slowly finding its own ways of responsibly improving regulation, whilst it also tries to increase liquidity in its bond markets and mitigate risk for economic stability.
As Michael Wu, Greater China country executive for Northern Trust, says: “We have seen a rise in the adoption of middle office outsourcing among newly established private fund management companies as they look for ways to achieve cost efficiencies and speed to market.”
He adds: “This has led to an increased number of local securities companies becoming active in this space with a unique offering by bundling middle office with trade execution solutions.”
A new dawn, a new day
While China grapples with innovation regulation, the light hasn’t dimmed on recent progression in China’s asset servicing sphere.In July 2017, UBS Asset Management was granted a private fund management license from the Asset Management Association of China. The license allowed UBS’s wholly foreign-owned enterprise, UBS Asset Management (Shanghai), to offer onshore fixed-income, equity, and multi-asset private funds to investors in China.
UBS Asset Management is the first qualified domestic limited partner licence holder to receive a private fund management licence in the country.
And, just last October, Clearstream partnered with Citi in an effort to increase Chinese bond trades—it offered international market participants access to China’s fixed-income market via its cross-border trading programme, Bond Connect.
Bond Connect is a mutual access scheme that allows institutional investors from mainland China and overseas to trade in each other’s bond markets, through a connection between China and Hong Kong’s financial hubs.
The first phase of the scheme, allowing for northbound trading, went live on 3 July 2017, after Citi announced it had been selected as an official Bond Connect trading dealer by the People’s Bank of China.
Starting from 20 November 2017, Bond Connect extended the China Interbank Bond Market (CIBM) to Clearstream clients throughout the rest of the world, via Hong Kong.
Philip Brown, co-CEO of Clearstream Banking, said: “China Bond Connect represents a major breakthrough in the opening of the Chinese capital markets, contributing to the growing international recognition of the important global role that the CIBM has assumed over the past years.”
Elsewhere, encompass, the know-your-customer automation provider, partnered with The Wanda Credit Service, a subsidiary of Wanda Group in May.
In light of the aforementioned increase in enforcement of financial crime laws, encompass enables firms to verify consumer and business information based on Wanda’s registry, company and consumer data through the encompass platform.
Paul Charmatz, managing director at encompass, said: “By integrating Wanda’s high-quality verification services on Chinese entities and individuals into our platform, we have significantly eased the regulatory burden for our customers.”
A new (artificial) life
One of China’s strengths is its recent advancements in financial technology.
Finastra, for one, has given several Asia Pacific (APAC) financial technology firms access to its FusionFabric.cloud platform, including InfoTrie, HedgeSPA and Paretix.
FusionFabric.cloud, underpinned by Microsoft Azure, enables third parties to develop and deploy apps.
The University College London is also allowing overseas students, visiting London from China, to develop apps on the FusionFabric.cloud platform in Mandarin.
Chinese innovation in financial services poses an opportunity for the wider fund management industry, according to Porter Erisman, former vice president at Chinese ecommerce platform, Alibaba Group.
Through development of mobile payments capabilities, fintech is now “part of the daily fabric of people’s lives” in China, he says.
Going forward, Erisman suggested that “data is going to drive the revolution”, because in China, there is a lot of data available on the cloud, without the same sensitivity around data protection seen in other parts of the world.
Erisman added: “More than anything, it’s a way for you all to tap into the hungry Chinese investors.”
As Wu reiterates: “China is home to some of the world’s largest fintech companies and is a leading force in areas such as mobile payment.”
“The phenomenal growth is fueled by an open regulatory environment where regulation typically lags innovation.”
“This may change as regulators start to take a tough stand in areas such as online lending in order to prevent financial systemic risk.”
Of exchange traded funds (ETF), Wu said: “Investor acceptance will continue to grow for ETFs in China. With the proposed ETF Connect, it may provide another pivotal point for growth as the product provides an effective way to invest in a broader market.”
China’s future
You’d be naive to think that, like the rest of the world, China hasn’t taken advantage of the leading cryptocurrency, bitcoin. But last year, in a sudden move the government banned it.
At the turn of last year, China accounted for nearly 90 percent of trading in bitcoin. China’s central bank ordered an immediate ban on initial coin offerings, the unregulated alternative to initial public offerings for tech forward start-ups.
And shortly after that, Chinese cryptocurrency exchanges were ordered to stop trading, which Japan and South Korea took advantage of. However, there are now rumours that the ban might be reversed leaving China’s cryptocurrency policy unclear.
But as Wu predicts: “As the level of sophistication increases among investors, focuses are likely to shift to advanced analytics solutions, data transparency and digitalisation, which will be largely driven by technological innovation”, and it would seem cryptocurrencies are the biggest part of that innovation evolution.
In the 1970s, China experienced an increase of urban workers into higher-paying jobs in cities. Eventually the Shanghai stock exchange was reopened in December 1990, which in turn led to China’s accession to the World Trade Organisation.
Skip forward to 2018, and the current Chinese president, Xi Jinping is attempting to improve the country’s economic prospects with an on-going five-year anti-corruption campaign.
Corruption is viewed as a serious issue in China. According to the Ministry of Public Security, Chinese police recovered RMB 35.6 billion ($5.4 billion) and closed 168,000 financial crime cases in 2016.
In 2017, The Chinese Securities Regulatory Commission announced administrative penalties of RMB 7.57 billion ($1.2 billion). So no surprise then that last November, the Chinese government launched a new ‘super regulator’, headed by vice-premier Ma Kai.
The agency will reportedly assist the government with regulation and initiate policies on China’s financial security.
China still faces issues with its financial regulation and, under Jinping’s guidance, seems to be slowly finding its own ways of responsibly improving regulation, whilst it also tries to increase liquidity in its bond markets and mitigate risk for economic stability.
As Michael Wu, Greater China country executive for Northern Trust, says: “We have seen a rise in the adoption of middle office outsourcing among newly established private fund management companies as they look for ways to achieve cost efficiencies and speed to market.”
He adds: “This has led to an increased number of local securities companies becoming active in this space with a unique offering by bundling middle office with trade execution solutions.”
A new dawn, a new day
While China grapples with innovation regulation, the light hasn’t dimmed on recent progression in China’s asset servicing sphere.In July 2017, UBS Asset Management was granted a private fund management license from the Asset Management Association of China. The license allowed UBS’s wholly foreign-owned enterprise, UBS Asset Management (Shanghai), to offer onshore fixed-income, equity, and multi-asset private funds to investors in China.
UBS Asset Management is the first qualified domestic limited partner licence holder to receive a private fund management licence in the country.
And, just last October, Clearstream partnered with Citi in an effort to increase Chinese bond trades—it offered international market participants access to China’s fixed-income market via its cross-border trading programme, Bond Connect.
Bond Connect is a mutual access scheme that allows institutional investors from mainland China and overseas to trade in each other’s bond markets, through a connection between China and Hong Kong’s financial hubs.
The first phase of the scheme, allowing for northbound trading, went live on 3 July 2017, after Citi announced it had been selected as an official Bond Connect trading dealer by the People’s Bank of China.
Starting from 20 November 2017, Bond Connect extended the China Interbank Bond Market (CIBM) to Clearstream clients throughout the rest of the world, via Hong Kong.
Philip Brown, co-CEO of Clearstream Banking, said: “China Bond Connect represents a major breakthrough in the opening of the Chinese capital markets, contributing to the growing international recognition of the important global role that the CIBM has assumed over the past years.”
Elsewhere, encompass, the know-your-customer automation provider, partnered with The Wanda Credit Service, a subsidiary of Wanda Group in May.
In light of the aforementioned increase in enforcement of financial crime laws, encompass enables firms to verify consumer and business information based on Wanda’s registry, company and consumer data through the encompass platform.
Paul Charmatz, managing director at encompass, said: “By integrating Wanda’s high-quality verification services on Chinese entities and individuals into our platform, we have significantly eased the regulatory burden for our customers.”
A new (artificial) life
One of China’s strengths is its recent advancements in financial technology.
Finastra, for one, has given several Asia Pacific (APAC) financial technology firms access to its FusionFabric.cloud platform, including InfoTrie, HedgeSPA and Paretix.
FusionFabric.cloud, underpinned by Microsoft Azure, enables third parties to develop and deploy apps.
The University College London is also allowing overseas students, visiting London from China, to develop apps on the FusionFabric.cloud platform in Mandarin.
Chinese innovation in financial services poses an opportunity for the wider fund management industry, according to Porter Erisman, former vice president at Chinese ecommerce platform, Alibaba Group.
Through development of mobile payments capabilities, fintech is now “part of the daily fabric of people’s lives” in China, he says.
Going forward, Erisman suggested that “data is going to drive the revolution”, because in China, there is a lot of data available on the cloud, without the same sensitivity around data protection seen in other parts of the world.
Erisman added: “More than anything, it’s a way for you all to tap into the hungry Chinese investors.”
As Wu reiterates: “China is home to some of the world’s largest fintech companies and is a leading force in areas such as mobile payment.”
“The phenomenal growth is fueled by an open regulatory environment where regulation typically lags innovation.”
“This may change as regulators start to take a tough stand in areas such as online lending in order to prevent financial systemic risk.”
Of exchange traded funds (ETF), Wu said: “Investor acceptance will continue to grow for ETFs in China. With the proposed ETF Connect, it may provide another pivotal point for growth as the product provides an effective way to invest in a broader market.”
China’s future
You’d be naive to think that, like the rest of the world, China hasn’t taken advantage of the leading cryptocurrency, bitcoin. But last year, in a sudden move the government banned it.
At the turn of last year, China accounted for nearly 90 percent of trading in bitcoin. China’s central bank ordered an immediate ban on initial coin offerings, the unregulated alternative to initial public offerings for tech forward start-ups.
And shortly after that, Chinese cryptocurrency exchanges were ordered to stop trading, which Japan and South Korea took advantage of. However, there are now rumours that the ban might be reversed leaving China’s cryptocurrency policy unclear.
But as Wu predicts: “As the level of sophistication increases among investors, focuses are likely to shift to advanced analytics solutions, data transparency and digitalisation, which will be largely driven by technological innovation”, and it would seem cryptocurrencies are the biggest part of that innovation evolution.
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