Under ChAFTA, China has offered its best ever market access commitments in an FTA with a major developed economy. One of ChAFTA’s big winners is likely to be the Australian financial services industry, particularly the funds management sector. The Declaration of Intent to formalise ChAFTA, signed last week, coincides with a series of efforts to liberalise China’s capital markets and internationalise the RMB. These measures will place Australian fund managers in a prime position to take advantage of Chinese opportunities.
In this note, we outline some of the recent developments most relevant to the Australian funds management industry. Read more about the FTA in our ChAFTA alert, which is available here.
RQFII – Australian RMB quota
As anticipated, under ChAFTA China has granted Australia an initial quota of RMB 50 billion (A$9.28 billion) under its RMB Qualified Foreign Institutional Investor (RQFII) program to invest in Chinese securities. This will allow approved Australian financial institutions, such as fund managers and banks, to invest offshore RMB in onshore Chinese financial instruments, including Chinese equities. This is an area of significant potential growth for Australia’s funds management industry, particularly with increasing international demand for RMB investments reflecting the reweighting of global indices towards China. Australian banks can also be expected to benefit from the Australian RQFII quota, for example for corporate treasury services for Australian corporates.
The RQFII program will give Australian financial institutions access to:
- China “A” shares (exempt from capital gains tax, for the time being);
- Securities in a number of Chinese growth sectors, such as healthcare, technology, multimedia, and consumer, not currently listed outside of China; and
- Chinese fixed-income products.
Direct Access to Qualified Domestic Institutional Investors
China will allow Australian securities brokerage and advisory firms to provide cross-border securities trading accounts, custody, advice and portfolio management services to Chinese Qualified Domestic Institutional Investors (QDIIs). This initiative is expected to offer a significant expansion of Australian fund managers’ distribution opportunities in China.
Loosening regulatory restrictions
ASIC and the China Securities Regulatory Commission have agreed to strengthen cooperation and improve mutual understanding of Australia’s and China’s respective regulatory frameworks. China has committed to guarantee Australian fund managers the ability to conduct domestic funds management business, and to streamline financial services licence applications.
Equity ownership restrictions have also been loosened. China has agreed, for the first time in an FTA, to:
- Allow Australian financial services providers to establish joint venture futures companies with up to 49 percent Australian ownership (foreign participation was not previously permitted);
- Increase foreign equity limits to 49 percent for participation in underwriting of domestic “A” and “B” shares and “H” shares (listed in Hong Kong); and
- Extend national treatment to Australian financial institutions for approved securitisation business in China.
One of the areas identified under ChAFTA for further cooperation is the encouragement of Australian private equity funds’ investments into China. The Australian PE sector can expect increased access to Chinese investments in the future.
Australian RMB Clearing Bank
The People’s Bank of China (PBOC) and the RBA signed a Memorandum of Understanding to establish an RMB clearing bank in Sydney to support growing demand for RMB-denominated trade settlement as well as investment. This will provide a more direct method of executing cross-border RMB transactions and will facilitate the efficient operation of the RQFII program in Australia.
The RMB clearing bank is complemented by the currency-swap arrangements in place since 2012 between the RBA and the PBOC, as well as the RMB settlement service established in Sydney earlier this year, which utilises the ASX’s Austraclear to allow Australian companies to use RMB as a settlement currency in cross-border transactions. For more information on the announcement of Sydney’s RMB clearing bank, see our alert here.
The Shanghai-Hong Kong Stock Connect, which launched successfully last week, allows offshore investors to trade securities listed on the Shanghai Stock Exchange through Hong Kong, with trades conducted in RMB. Foreign investors will be exempt from income tax on capital gains derived from the trading of “A” shares under the program, for the time being. This will give Australian fund managers easier access to China’s domestic equities market.
Clearly the winds of change are blowing in China’s financial services industry. ChAFTA and other recent Chinese market liberalisation initiatives represent significant positive developments for Australian fund managers looking to access Chinese markets. But the competitive advantage afforded to Australian financial institutions under ChAFTA will not last as other countries are expected to receive similar concessions in the future. We encourage Australian fund managers to take the initiative as we expect early movers to be best placed to take advantage of longer term Chinese opportunities.