Chinese Communist Party 3rd Plenum – Financial Market Reforms and the Impact on IFCs

December 2013

Contents and Agenda

• China Reform Process and the Communist Party Central Committee 3rd Plenum

• RMB Internationalisation

• Offshore RMB Market – Hong Kong

• Offshore RMB Market – Singapore

• Offshore RMB Market – London

• UK-China Relationship and David Cameron’s Delegation

• Cicero Research - Attitudes in Hong Kong to the rise of China

Communist Party Third Plenum – 18th C. Committee

Annual or bi-annual meetings of the Central Committee of the Communist Party

Central Committee is the Highest Decision Making Body of the Communist Party

376 members occupy the top posts in China’s administration and military

National Congress held every five years – plenums matter the most

Previous Major Plenums:

• 1984 – countryside reforms expanded to the cities

• 1988 – wage and price reforms• 1993 – start of systemic

market reform• 2003 – refocus on

development and technological innovation

What are the issues?

Financial Sector Reform: reform of interest rates, Yuan convertibility

State Owned Enterprises: breaking the monopolies in banking, TelCo, energy…

Household Registration: breaking down social barriers and supporting migrants

Land Reform: extending private property rights to the rural class

Local Government Funding: issuance of local government bonds, tackling debt

Environment: balancing development with environmental protection

Middle Income: avoiding the middle income trap

Four Key Themes

What are the themes?

• Overcoming bureaucracy - new “team” created to drive through reform, reporting directly to the leadership;

• Power consolidation - creation of a new “NSC” grabs power from the Central Committee;

• Party-led liberalisation - the free market “will be given a decisive role in allocating resources” but “the Party must give full play to its core role of commanding the whole situation and coordinating the efforts of all quarters”;

• Reform of property rights - in particular for farmers and rural-dwellers.

What are the views?

Xu Hongcai, China Centre for International Economic Exchanges: “The reforms are unprecedented… Reforms in 1990s were limited to some areas, now reforms are all-round.”

Jack Lew, US Treasury Secretary:“The direction is significant, but the character and the pace of change matters.”

Andrew Sheng, Advisor to the CBRC and President of the Fung Global Institute“A successful transition to the next phase of wealth creation – driven by the services sector and knowledge-based industries – will require a more market-oriented approach, in which the state cedes some control over the economy and focuses instead on protecting property rights, administering welfare services, reducing pollution, and eliminating corruption.”

What are the reforms?

What are the indicators?

2014 GDP Growth Target

Target < 7.5% - reforms prioritised over GDP

Reform Team Leadership

Senior figures = reform programme commitment

VAT Reform

Replacing business tax with VAT in more sectors

SOE Reform

Breaking monopolies; allowing SOEs to fail

Currency Intervention

PBOC has indicated it will cease regular intervention

Shanghai FTZ

Consistent liberalisation of the “negative list”

RMB Internationalisation

• RMB – currently trades at two exchange rates:• Onshore – CNY (exchange rate with USD fixed by PBOC)• Offshore – CNH (traded at a rate of USD/CNH, deliverable RMB in HK)

• CNH market is very small and illiquid, but growing significantly since 2010 reforms

• CNY demand is driven by Chinese exporters looking to convert USD into RMB

• CNH demand is driven by private demand and supply. Supply tightly controlled, therefore CNH trades above CNY

• CNH market is growing considerably:• Some foreign corporates allowed to issue CNH-denominated bonds in 2010

(ADB, McDonalds…)• Capital controls are gradually being lifted allowing foreign investors to invest

CNH in the onshore market• Liberalising the exchange rate: 3rd Plenum - “China will improve the market

based Yuan exchange rate formation system and speed up the marketisation of interest rates”

RMB Internationalisation – Four Stages

Exchange Rate

Reforms

Interest Rate

Reforms

Capital Account Reforms

Pricing Mechanis

m Reforms

• PBOC Governor: Central Bank will “basically exit” from regular currency market intervention

• Continual widening of Yuan trading band

• Lending rate ceiling removed

• Introduction of deposit insurance scheme in 3 – 5yrs

• Expansion of QFII and QDII quotas

• Scrapping volume limits

• Increasing convertibility in banking transactions

• Greater role for markets in determining prices and wages

• Greater competition – dismantling the SOEs

RMB Internationalisation – Capital Account Reform

Qualified Foreign Institutional Investor Programme (QFII)

• Launched in 2002

• Principal means by which foreign investors can invest in China’s securities markets

• Five classifications: commercial banks, asset managers, insurance companies, securities companies, other institutional investors

• Controlled through quotas set by the PBOC

• Managed by SAFE

• Difficult to repatriate funds

Qualified Domestic Institutional Investor (QDII)

• Launched in 2006

• Principal means by which domestic investors can invest overseas, principally in fixed income and money market products

• Expanded in 2007 to include stocks

• Initially HK, now expanded to the US

• Controlled through quotas set by CSRC

Offshore RMB Markets - Asia

• 2004 - RMB deposits allowed in Hong Kong

• 2004 - Bank of China appointed as a clearing bank

• 2007 – China Development Bank issues first RMB bond

• 2009 – pilot RMB settlement system

• 2010 – HKEX launches RMB securities clearing system

• 2013 – 75% of world’s overseas RMB reserves held in HK

Hong Kong

• 2012 – two Chinese banks granted QFB privileges

• 2013 – ICBC appointed clearing bank for RMB

• 2013 – PBOC and MAS expand bilateral currency swap to RMB 300bn

• 2013 – MOU signed on “greater RMB business collaboration”

• 2013 – RFQII quota set at RMB 50bn

• Standard Chartered Index: Singapore #2 Offshore RMB Centre

Singapore

Offshore RMB Markets - London

• RFQII RMB 80bn Quota

• RMB 200bn currency swap arrangement between Bank of England and PBOC

• Agreement on direct trading between GBP and RMB offshore and in Shanghai

• Chinese banks allowed to establish wholesale branches in London – previously Chinese banks were forced to subsidiarise and often based their HQs in Luxembourg

• ICBC issues RMB 2bn bond in London

• November – announcement that Standard Chartered and Agricultural Bank of China will offer a clearing arrangement in London

London - 2013

UK-China Relationship – Cameron’s Trade Mission

• Pragmatism reigns – no mention of political or human rights reform

• Announcement that Standard Chartered and Agricultural Bank of China will offer a clearing arrangement in London

• Cameron promises to put his full political weight behind a China-EU FTA – eliminating tariffs in 20 key sectors

• Chinese investment opportunities in HS2 and further nuclear power schemes

• GBP200m fund to promote scientific collaboration

• GBP4.5bn JLR deal

• Trending comments on Weibo – China’s version of Twitter – sum up the difficult history between China and the UK which has in the past been a stumbling block to greater collaboration:

Yongmian: "Mr prime minister, are you bringing opium with you?"

Glorious Ming: “When will you compensate us for the Old Summer

Palace?”

Wuyanliuju: “Dalai's friend has come to China for our silver”

Attitudes in Hong Kong – Constitutional Settlement

The rise and internationalisation of China has a global impact, not least in Hong Kong. Cicero Research commissioned an online survey of 1000 citizens of Hong Kong earlier in the year. Questions focussed on the role of Hong Kong as a financial centre, and attitudes in Hong Kong to the rise of China

Hong Kong should maintain its own strong, distinctive identity

It will remain important that the citizens of Hong Kong are fluent in English

There should be greater restrictions on non-Hong Kong citizens using public services, such as healthcare

Hong Kong Basic Law should be guaranteed in its current form after the year 2047

For Hong Kong to remain internationally competitive it is important that it maintains an economy which is open to foreign workers and investment

54%

52%

44%

39%

39%

33%

32%

35%

28%

43%

6%

9%

4%

Strongly agree Somewhat agree Somewhat disagree Strongly disagree

Attitudes in Hong Kong – Constitutional Settlement

Q: Regarding Hong Kong's political freedoms, do you think that the Legislative Council should be...?

Fully elected by citizens of Hong Kong

Partially elected by citizens of Hong Kong, partially appointed by the government of the People's Republic of China

Fully appointed by the government of the People's Republic of China

Don't know

75%

23%

0%

2%

Attitudes in Hong Kong – Constitutional Settlement

Q: Do you think that the Chief Executive of Hong Kong should be directly elected by the people of Hong Kong alone or should they be approved by the State Council of China?

Directly elected by the people of Hong Kong alone

Approved by the State Council of China

Don't know

85%

10%

5%

Direct

ly ele

cted

by

the

peop

le of

Hon

g Kon

g alo

ne

Appro

ved

by th

e Sta

te C

ounc

il of C

hina

Don't k

now

81%

15%4%

89%

5% 6%

Male

Female

Attitudes in Hong Kong – Cultural Settlement

Q: What do you think is currently the most important SECOND LANGUAGE for citizens of Hong Kong?

31%

69%

Mandarin

English

Q: In ten years what do you think will be the most important SECOND LANGUAGE for citizens of Hong Kong?

51%49%

Attitudes in Hong Kong – Cultural Settlement

18 – 24

25 – 34

35 – 44

45 – 54

55+

49%

63%

66%

72%

83%

22%

12%

10%

7%

2%

Disagree

Agree

Q: Chinese history and citizenship should be taught in Hong Kong schools - To what extent do you agree or disagree with the following statements? (Age Breakdown)

Attitudes in Hong Kong – Economic Settlement

Chinese history and citizenship should be taught in Hong Kong schools

Hong Kong SAR should have formal representation in the legislative and executive system of the People’s Republic of China, such as the State Council

Hong Kong will benefit from the internationalisation of China’s financial markets

32%

24%

31%

34%

44%

41%

6%

6%

8%

Strongly agree Somewhat agree Somewhat disagree Strongly disagree

Attitudes in Hong Kong – Economic Settlement

Don't know

None of the above

Pressures on the transport system

Pressures on healthcare

Cost of energy

Pressures on the education system

Levels of pollution

The economic downturn in China

The economic downturn in Asia as a whole

The Western banking crisis

Lack of affordable housing

The impact of the Eurozone crisis on global trade

China's influence over political decisions in Hong Kong

2%

1%

4%

7%

8%

13%

21%

27%

27%

32%

37%

39%

49%

Q: Which of the following do you see as the top biggest obstacles to economic growth in Hong Kong?

Attitudes in Hong Kong – Economic Settlement

Don't know

Shenzen

Seoul

Tokyo

Shanghai

Singapore

Hong Kong

5%

0%

1%

6%

12%

12%

64%

8%

2%

2%

2%

38%

16%

33%

In 10 Years

Now

Q: Which of the following do you currently see as being the most important financial centre in Asia? (Now and in ten year’s time)

14%

39%25%

14%

8% China will become the world's largest economy within the next five years

China will become the world's largest economy within the next ten years

China will become the world's largest economy within the next twenty years

The USA will re-main the world's largest economy for the foreseeable future

Don't know

Q: Which of the following statements do you MOST agree with?

Attitudes in Hong Kong – Economic Settlement

Don't know

Shenzen

Seoul

Tokyo

Shanghai

Singapore

Hong Kong

5%

0%

1%

6%

12%

12%

64%

8%

2%

2%

2%

38%

16%

33%

In 10 Years

Now

Q: Which of the following do you currently see as being the most important financial centre in Asia? (Now and in ten year’s time)

14%

39%25%

14%

8% China will become the world's largest economy within the next five years

China will become the world's largest economy within the next ten years

China will become the world's largest economy within the next twenty years

The USA will re-main the world's largest economy for the foreseeable future

Don't know

Q: Which of the following statements do you MOST agree with?

Attitudes in Hong Kong – Economic Settlement

Don't know

Japan

Europe

South East Asia

USA

China

6%

1%

2%

6%

14%

70%

7%

1%

5%

6%

7%

73%

In 10 years

Current

10%

20%

22%

18%

Strongly agree

Somewhat agree

Somewhat disagree

Strongly disagree

Q: Hong Kong is a better place to live because of the end of British colonial rule in 1997

Q: Which of the following is Hong Kong's most important trading partner now?

Cicero Group is an integrated communications agency principally owned by directors and staff. Our expert teams drawn from media, industry and government have a simple mission – to help clients design and implement communication strategies to realise their commercial ambitions, manage their reputation and maximise their return on investment.

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