Hong Kong Shanghai Connect: A Huge Leap Forward

The Hong Kong-Shanghai Connect has finally started. 

This is a very, very significant step in the reform process that China has started, and as outlined in 2013 during the Third Plenum (please see our China Compass of both March and May 2014), this is an important puzzle piece in the whole financial reform and liberalization process: a PRC stock exchange has opened up to the world.

Non PRC investors (not only Hong Kong residents but all overseas investors) are now able to directly buy shares listed on the Shanghai stock exchange, (“northbound”), and qualified PRC investors (individual investors with a minimum of RMB 500k in their accounts, in other words the better off) are able to invest in HK listed stocks (“southbound”), (including of course the international firms that have used HK as a listing exchange, who will now benefit from a huge potential new investor base).

There are exceptions in both directions, such as shares not traded in RMB in Shanghai (so called “B” shares) or not traded in HKD in Hong Kong, or Hong Kong shares with a dual listing in another Chinese city than Shanghai. 

Also the Hong Kong Shanghai Connect does not work for IPO’s; international investors can continue to participate in HK IPO’s, but not in Shanghai as yet. Similarly the Chinese investors in Hong Kong IPO’s cannot use the Connect for this purpose. This is bound to change over time.

Nevertheless the two exchanges become so closely intertwined, that this is clearly the first step of a long process through which ultimately One China Exchange will be created. Already there is talk of a future addition of Shenzhen to this couple, creating a really powerful threesome.

Already the new “virtual” HK-Shanghai combination becomes the 2^nd largest stock exchange globally by capitalisation, and 3^rd largest by turnover.

Focusing first on the northbound traffic into Shanghai:

Suddenly 985 Chinese companies (855 that did not have a dual listing with HK), become accessible to the global investment community. This will increase the global investment focus on the top companies in this group, which will slowly but surely have a positive impact on transparency. The global investor focus on China will increase, and evolve from just macroeconomics to specific company analysis. (Knowledge of Putonghua and a real understanding of China will be a plus!)

There is also a deeper agenda; many SOE’s have listed subsidiaries in Shanghai. International investors will over time force the SOE’s to act increasingly like the private sector, which fits perfectly with the Governments agenda to stimulate SOE reform.  

Remember that the new mantra is that “market forces will play a decisive role in the allocation of all resources”, which includes capital, and includes SOE’s. Similarly the Government is looking for private investment in the public SOE’s, in order to assist them to reform. The Connect is a backdoor into some SOE’s.

With regard to the southbound traffic:

Chinese investors have had limited opportunities to (legally) invest their funds; hence the real estate prices, the success of Yu E Bao (Alibaba’s savings account), and the wealth management products linked to shadow banking.

We believe the demand for diversification is very strong, (driven also by a very high savings quotient) and therefore the chance to invest in Hong Kong stocks that are not also listed in China, or even sectors that are not available through the Chinese exchanges, will be taken up with huge eagerness.

Other issues that will logically materialise:

The purpose of Chinese companies having dual listings SH-HK mostly falls away. This is bound to have a longer term negative impact for Hong Kong, as Hong Kong was also the PRC company’s window to the west. The Shanghai listed PRC companies will over time likely opt to focus on Shanghai, and delist their HK shares, as currency exchange regulations also liberalise.

On the other hand however, Hong Kong does become more important as a listing exchange for international companies seeking exposure to Chinese investors.

All in all exciting times. The Connect is but another step forward on the reform path, albeit a huge leap for Chinese financial reform.

Daniel P. de Blocq van Schetlinga

Polarwide Ltd.

Your Compass on China (June 2014)

June 2014

Daniël de Blocq van Scheltinga +852 2530 0611

daniel.dbvs@polarwide.com
                                                                                                         
Paul Hodges +44 (0)20 7700 6100 
phodges@iec.eu.com

Here Today, Gone Tomorrow?A Simple Guide to China’s World of Trade Finance

Executive Summary

• This Simple Guide to China’s World of Trade Finance aims to explain the mechanisms behind the barely-understood financing deals that have come to dominate China’s multi-$bn markets for copper, iron, rubber and other major commodities

• This ‘collateral trade’ seems now to be in danger of imploding, creating major risk for the world’s commodity and financial markets, as well as for China’s property market

• The trade’s origin lies in China’s stimulus programmes since 2009, which created a major boom in housing markets, often financed through the shadow banking system

•  In turn, trade finance schemes became a popular funding mechanism for such investments: with commodities such as copper becoming collateral for this funding

• The 3^rd Plenum’s decision to allow market forces to play a “decisive” role in the economy means the property boom is now facing a government-initiated squeeze, whilst the People’s Bank of China (PBOC) is investigating the trade finance schemes

• Product now tied up in this ‘collateral trade’ is likely to be released onto the market in a disorderly manner: China’s housing market bubble risks losing air very quickly 

1.     Introduction

Chart 1: Copper in bonded warehouses in China

Tins of sardines were very hard to obtain in the UK during World War 2.  As a result, the tins were often simply traded between companies, without ever being eaten.

One day, a company decided to open some tins to provide a celebratory lunch for its workforce.  They found that all the sardines had decayed, and were uneatable.  The company complained to its supplier, only to be told - "That's not our fault.  Those sardines were for buying and selling, not for eating."

This is the best analogy we can make for the ‘collateral trade’ now dominating many commodity markets due to the growth of China’s shadow banking sector to $3.5tn+.  This trade has even begun to be seen in polymer markets, with polyethylene now involved.

The ‘collateral trade’ has been a major component of the financing required to support China’s $10tn lending boom over the past 5 years.  The volumes involved are huge – China has been buying two-thirds of the world’s supply of iron ore, and has been responsible for 40% of global copper market demand.  Reuters has suggested that 100 million tonnes of iron ore are currently "off-market" by being tied up in the 'collateral trade'.  This volume is enough to build 1200 buildings the size of New York's Empire State building.

These vast stockpiles have also helped to keep world market prices at high levels in recent years.  But now there are clear signs that the various schemes involved in the bizarre world of China's trade finance, which helped finance these stockpiles, are imploding.  The reason is that China’s leadership want market forces to play a much greater role in the economy, as we described in Will Market Forces Start to Play a Major Role in China?

Two such schemes are as follows:

Scheme 1: Using inventory to invest off-shore funds in WMPs

Chart 2: How Letters of Credit have been used to fund property trading via WMPs

This scheme uses inventory to obtain off-shore cash to invest in Wealth Management Products (WMPs) via the shadow banking system.  These WMPs can attract interest rates of up to 60%, from real estate developers to finance building work on their apartment blocks.

An example of how it can operate using Letter of Credit (L/C) trade finance is as follows:

•  LC1 Is opened.  Company A opens an L/C with a major bank to import copper
•  LC1 is used to pay the copper producer
• Company A typically then has 6 months to repay LC1, having paid a 20% deposit
•  But demand is weak, so it doesn't need the inventory for its normal business 
• So it decides to sell the copper to an associated overseas company (‘Company B’)
• Company B is often a Hong Kong-based company, able to access offshore funding
• Company B pays Company A with this offshore money, allowing Company A to invest in high-return Wealth Management Products (WMP) via the shadow banking system
•  LC2 is opened.  Company A then obtains another L/C (“LC2”), and buys back the same copper from Company B: as before, LC2 need not be repaid within 6 months
• At this point the copper is now back in China, and Company B has been repaid
• Company B then buys back the copper using offshore funding, enabling Company A to repay LC1

Company A now only has only LC2 left to repay, and its investment in WMPs means it is earning a much higher interest rate than cost of the L/C.  In addition, the relentless appreciation of the renminbi since 2009 created an additional exchange rate gain. 

A key attraction of the system is that whole cycle can be repeated endlessly.  It can also involve multiple trades and overseas associated companies.  Investment bank Goldman Sachs suggest that up to $160bn may have been involved in such capital inflows since 2010.

The commodity is, of course, never actually used.  But because it is being held off-market as collateral, the outside world assumes this perceived demand is proof of China’s insatiable demand for commodities.  So investors line up to fund new developments to increase global supply, not realising the end-use of their money is to fuel China’s property bubble.

Scheme 2: Buying imported product to sell on the futures market

This scheme is a simple variant on the above. It involves buying an imported product on normal 180 day (or longer) payment terms, and then immediately selling the product on a futures market.  This is what appears to have happened in Q1 with polyethylene.

The buyer then uses the credit provided by the seller to fund their investment in WMPs.       

2.     Everybody loved these Schemes – until the 3^rd Plenum       

The above schemes have been in operation since the stimulus programme began in 2009, and the players have made very healthy profits from them.  The previous Chinese leadership was also happy to allow these schemes to flourish.  They saw shadow banking as helping to support some of their key objectives by:

• Creating a property 'wealth effect' to boost domestic consumption
• Boosting employment by encouraging construction projects
• Replacing lost export business to the West with domestic consumption
• Maintaining relatively high levels of domestic economic growth

The producers of the various commodities involved, and their investors were also happy.  Commodities tied up in 'collateral financing' were effectively "off-market" as they couldn't be sold into the physical market.  So the 'collateral trade' helped to create the illusion of a tight market, and provided major support for world prices.

China’s 3^rd Plenum changed all this however, as we described in our March Note.

3. Now the new leadership is forcing the sardine cans to be opened

Many players in these schemes had assumed they could continue for ever.  But China's new leadership understands that China's credit bubble has created enormous risks for economic stability.  As state-owned China Daily commented last month under the heading 'Let the bubble be squeezed':

"Admittedly, a thriving real estate sector has served as both a growth engine for many local economies and a key driver behind the country's urbanization.  However, it makes no sense to try to sustain a property boom at any cost when it has become dangerously frothy.   Fortunately, policymakers from the central bank have not blinked in face of the short-term pressure of shrinking property sales."

Similarly, China’s Academy of Urban Design has warned:

"China, on the one hand, has witnessed the absurd phenomenon of 'ghost cities' and excess investment in property development. On the other hand, it has large, densely packed cities that have scant traffic management and medical resources.”

Thus the People's Bank of China (PBOC), the central bank, has begun to change the regulatory system.  One policy move has been to create exchange rate volatility by pushing down the value of the renminbi versus the US$.  This creates losses for those speculating in the trade finance area, and makes people more cautious about future exchange rate gains.

Now, however, the issue has begun to assume global significance.  This month, a $1.6bn scandal has erupted at China’s 3^rd largest port, Qingdao, allegedly involving multiple loans made using the same collateral.  Reportedly, it involves 20KT of copper, almost 100KT of aluminium ingots and about 200KT of alumina.  We believe further scandals are likely to erupt in coming weeks, due to the pervasive use of trade finance for the ‘collateral trade’.  

Everyone was happy ‘to turn a blind eye’ to the collateral trade when it was earning vast profits for all concerned.  But now, the party appears to be over.  And the hangover that it leaves is likely to be extensive:

• Many banks are now increasing their deposit level for Letters of Credit from 20% to 50%, and there are rumours that Letters of Credit may even be banned altogether
• Thus there is clear potential for a cascade effect to begin, bringing down the whole house of cards.  Many of the companies involved in the ‘collateral trade’ probably cannot afford a 50% deposit, when the time comes to rollover their borrowing:
• They will then have to close their financing deals 
• The copper or other commodity will then return to its original owner 
• And as demand has slowed still further, they may well have to sell it
• The impact could be large, given China’s dominant position in world markets

At the same time, of course, the government’s decision to squeeze the property bubble removes the original rationale for the trade finance schemes to exist.  In fact, it is more likely that any downturn in the property sector will be self-reinforcing, just as the government seems to desire.

4. Conclusions

It is impossible to overstate the potential importance of these developments.  

Investors have become lulled into a false sense of security in recent years by the combined impact of (a) central bank policy and (b) China’s apparently insatiable demand.  They have not wanted to ask too many questions, for fear of finding that ‘”all that glitters in not gold”.  Thus they have happily financed major expansion in the supply of major commodities, assuming that central banks will keep interest rates low, and that China will continue to buy.

This assumption is likely now to be severely tested.  We suspect that the recent investigations in Qingdao will prove to be just the tip of the iceberg, and fear that the world is about to witness a disorderly unwinding of the ‘collateral trade’.  The gravity of the situation is confirmed by the fact that state-owned Citic Corporation has now gone to court in Qingdao to try and secure the assets it believes that it owns.

The risk that we will now see a 'dash for the exists', as described by Hyman Minsky:

• Investors have believed that central banks are in complete control
• They have also assumed that China is set for inevitable and long-lasting growth
• Thus market volatility has dropped to record lows
• Margin debt on the New York Stock Exchange has risen to record levels

Minsky argued that such long periods of stability leads to major instability, as investors become complacent about risk.  An event then occurs, such as today’s unwinding of the collateral trade, which makes them realise they have overpaid for assets during the bubble.  They then rush for the exits, only to find that potential buyers have disappeared.

We do not underestimate the potential impact and pain that will likely now ensure. But it is clearly a necessary development.  The volumes now tied up in these bizarre trade finance schemes have simply become too large to be financed on an ongoing basis.  Our concern is that a 'vicious circle' may now develop, impacting both good and bad assets.

Commodity makers investors in their ‘dash for cash’ may well find that liquidity has disappeared from their favoured “risk-on” markets.  They will thus be forced to sell high-quality assets in order to meet their commitments.   

--------------------------------------------------------------------------------------------------------------------------------- 

About Polarwide:  Polarwide is a Hong Kong-based financial and strategic advisory firm advising international companies with their Asian strategy.

Daniël de Blocq van Scheltinga was the first foreigner to be granted permission to run the finance company of a top-tier Chinese State Owned Enterprise, when  establishing and managing ChemChina Finance Company.  Previously, Daniël held a variety of senior positions in corporate and investment banking, including as Asia Pacific Head of Chemicals and Asia Head Asset Based Finance for ABN AMRO.  

He has lived in Hong Kong for 14 years, and continues to spend much of his time in China, advising both international and Chinese firms, as well as leaders in the public and private sectors.  Daniël is a graduate of Leiden University in the Netherlands, holding a Master of Law degree with a speciality of International law.

About IeC: IeC is a London-based strategy consultancy advising Fortune 500 and FTSE 100 companies, investment banks and fund managers.  

      Paul Hodges is a trusted adviser to major companies and the investment community, and has a proven track record of accurately identifying key trends in global marketplaces. He has been widely recognised for correctly forewarning of the 2008 global financial crisis. His analysis of the key role of demographics in driving the global economy is now attracting increasing interest from senior policymakers and executives. 

     

Paul is Chairman of International eChem (IeC) and non-executive Chairman of NiTech Solutions Ltd. Prior to launching IeC in 1995, Paul spent 17 years with Imperial Chemical Industries (ICI), both in England and the USA, where he held senior executive positions in petrochemicals and chloralkali, and was Executive Director of a $1 billion ICI business. Paul is a Freeman of the City of London and a Member of the Energy Institute.  He is a graduate of the University of York, and later studied with the IMD business school in Switzerland.

Disclaimer

This Research Note has been prepared by Polarwide/IeC for general circulation.  The information contained in this Research Note may be retained.  It has not been prepared for the benefit of any particular company or client and may not be relied upon by any company or client or other third party.  Polarwide/IeC do not give investment advice and are not regulated under the UK Financial Services Act. If, notwithstanding the foregoing, this Research Note is relied upon by any person, IeC/Polarwide do not accept, and disclaim, all liability for loss and damage suffered as a result.

©  IeC/Polarwide 2014

Typhoon "Reform"

And the financial reforms, discussed extensively in our last Your Compass On China (May 2014), continue unabated and at a fast pace. The following reuters newsreport only underlines what we have been saying all along:

(Reuters) - China's cabinet signaled on Tuesday it is closer to letting local governments directly sell bonds for the first time and said it would phase out opaque financing vehicles that are thought to have built up trillions of dollars of high-risk debt.

In a sweeping statement, the country's top economic planner, the National Development and Reform Commission (NDRC), said Beijing would deliver stable economic growth whilst pursuing reforms.

The promise to stay focused on reforms would appease critics who worry China's enthusiasm for bringing about painful changes may be on the wane as its economy stumbles.

The uncertain outlook for the world's second-largest economy was underscored on Tuesday by remarks from a senior Chinese trade official, who said the country has a tough road ahead if it wants to meet its 7.5 percent trade growth target this year.

Yet the NDRC said in a statement on its website that enacting change is a "first priority" for the government and hopes to make breakthroughs this year in key areas.

On fiscal reform, which caused a market stir on Tuesday after Chinese media reported that China would allow 10 local governments to directly sell municipal bonds, the NDRC signaled that the government won't disappoint investor expectations.

It said China will create a financing system for local governments that will let the sale ofmunicipal bonds be a major source of funding for governments.

Financing vehicles, which are set up by local governments to borrow on their behalf so as to get around laws that prohibit governments from borrowing directly from any parties, would also be phased out.

It said that Beijing would set limits -- or quotas -- on the amount of debt that can be raised by local governments.

"The policy has been made talked about several times, so the market is now waiting for details, in particular how the quotas will be set," said a senior trader at a major Chinese state-owned bank in Shanghai.

"I don't think the central government will immediately let local governments issue lots ofbonds and endanger the overall financial system."

A LONG-TERM SOLUTION

According to Chinese media, China is set to allow the 10 governments that include Zhejiang, Jiangsu, Shandong, Guangdong, Beijing, Shanghai and Shenzhen to directly sell municipal bonds.

Tuesday's statement did not refer to the above plans, though many analysts have said that the only viable, long-term solution for China with regards to its local government debt problem is to develop a thriving municipal bond market.

By allowing direct bond sales, Beijing can require higher degrees of disclosure in prospectuses and can also allow for the distribution of risk to a wider pool of potential investors.

Chinese local governments at present have limited legal options for fund raising, but have proven nimble at exploiting loopholes.

In addition to selling land to raise funds, they have created local government financing vehicles which have gone to the bond and loan markets to raise funds.

Local Chinese governments, which are notorious for being opaque, are estimated by some analysts to owe up to $4 trillion - 42 percent of China's GDP - much of it raised through financing vehicles.

A state audit of local governments' debt in December showed they owed a total of $3 trillion as of June 2013.

But despite concerns about the fiscal health of local governments, bonds sold by their financing vehicles are still sought after by investors. This is partly because many believe they are implicitly guaranteed by the state, even after Beijing allowed the country's first publicly-traded bond to default this year.

Other reforms canvassed in the NDRC guidelines included repeating commitments to a more market-oriented exchange rate, cutting red tape and deepening energy reforms.

"We should seize this time window when the overall price level is stable to actively push price reforms in resource products and sectors including transportation, telecommunications, pharmaceutical and healthcare industries," the NDRC said.

(Reporting by Aileen Wang and Koh Gui Qing in BEIJING and Pete Sweeney and Lu Jianxin in SHANGHAI; Editing by Kim Coghill)

Your Compass on China (May 2014)

                                                                     
                                       May 2014








Daniël de Blocq van Scheltinga +852 2530 0611
daniel.dbvs@polarwide.com 
                                                                                                          
Paul Hodges +44 (0)20 7700 6100 
phodges@iec.eu.com

China Accelerates its Reform of the Financial Sector

Executive Summary

•  Reform of the Financial Sector in China is a key stepping stone towards implementing the major reforms outlined in the Third Plenum
• Developments in Alibaba’s online money market fund “Yu’E Bao” and in shadow banking have acted as catalysts to speed up the pace of reform
• The aim is to make access to capital easier for healthy companies, and more expensive for problem firms, irrespective of whether they are state-owned or private
• This “level playing field” with regard to access to capital will make it easier for companies to invest and grow in China

1.      Introduction

Chart 1:  China’s Official and Shadow Bank Lending, 2009 – 2014 Q1

China’s lending programme since 2009 has been the largest in the world at over $10tn.  As Chart 1 shows, its official lending totalled $7tn at the end of March, with estimates of so-called ‘shadow lending’ suggesting this was now around $3.5tn, half the size of official lending.  By comparison, total US Federal Reserve lending though its Quantitative Easing programme currently amounts to $3.9tn.

The financial sector reforms announced at China’s Third Plenum last November thus have implications well beyond China itself, as we discussed in our March note (Will Market forces Start to Play a Role in China?).  The government’s aim is to start to allow “market forces to play a decisive role”, in line also earlier commitments made when China joined the World Trade Organisation.

Before discussing the implications of this development, it is important to first understand how China’s financial sector currently operates.  The key point is that the Chinese banking sector is an integral part of the state:

• In China the state-owned banks are the financial system, with nearly all financial risk concentrated on their balance sheets - whether through official or shadow bank lending
• The heart of the system includes just four banks (commonly referred to as the "Big Four") namely the Bank of China; China Construction Bank; Industrial and Commercial Bank of China; and Agricultural Bank of China
• These and the other major banks are all owned by the government, either through the Chinese Investment Corporation (CIC) or through the Ministry of Finance
• This ownership is focused through a holding company, Central SAFE Investments (known as "Huijin"), which CIC acquired in 2007.  Other "minority" shareholders in Huijin are mainly State-Owned Enterprises (SOEs), and are therefore also part of the government
• A further sign of state involvement came in 2012, when China's central bank (the People's Bank of China) tool a $50bn holding in CIC

Day-to-day operations are similarly controlled by the government as it chooses the Huajin board members.  Thus as a foreign banker working in one of the major banks explained to us, currently “all of the board members of different banks are trained in the same way, think in the same way, view risk in the same way, and structure their organisations in the same way”.

The implications of this can be seen in the handling of the 2009 stimulus packages, when the banks were the conduit for the government.  They lent the stimulus money to business, with the majority of the cash going directly to the SOE sector.  Essentially, therefore, it is fair to say that the major banks are currently used by the government to implement or fine-tune economic policy.

2.      The impact of Yu’E Bao and shadow banking on reform

This close linkage between government and banks means that the decision to reform the financial system has major implications for the entire SOE sector, and is a key part of the move to reform it. Importantly, though, the need to speed up the reform process has been made imperative by the rapid growth of Yu’E Bao, established in June 2013 by Ali Baba, China’s giant internet marketplace:

• Yu’E Bao (literally meaning: leftover treasure), is a new product offered by Alipay, the online payment service of Ali Baba
• It allows Alipay account holders to invest idle cash balances in money market funds online
• These funds pay higher interest rates than the banks, with deposits redeemable on demand
• Its growth over the past 10 months has been truly remarkable: it is now China’s largest money market fund with 81 million investors, and deposits of  Rmb 40bn ($87bn)
• This growth clearly caught the authorities by surprise, with a Huijin vice-chairman admitting to the South China Morning Post that “the emergence of Alibaba’s Yu‘E Bao online money market fund has prompted the authorities to speed up reform in the financial sector”.

In addition, there is the issue of the shadow banking system, which has come into global prominence  in the past 2 years, whilst the authorities have been trying to stabilise official lending.  Shadow banking was originally established in the early 1980s, as an informal mechanism by which privately-owned companies could lend to each other to fund their development.  (The Appendix provides a chart explaining the different lending mechanisms operated by the official and shadow banking systems.)  

But today it has grown to become a core part of China’s financial system with its capital provided by private and public sector organisations.  These include trust companies (often owned by the banks), as well as corporates and local government financial vehicles.  Individuals are also lenders, with  many ordinary Chinese attracted by the promise of potentially high returns.

As the Appendix shows, it does not retain reserves against bad debts and other costs.  Thus its recent rapid growth has prompted major concern due to (a) it being very lightly regulated (b) its role in helping to circumvent official lending limits and (c) its lending being associated with weak credit standards and potentially unenforceable repayment guarantees. 

3.      First steps on the reform path

Yu’E Bao’s success, allied to the need to better regulate the shadow banking sector, has thus underlined the need for major Chinese banks to be able to provide similar products to their customers.  This can clearly only occur as a result of reform.  Two examples highlight the changes now underway:

• CITIC Securities recently obtained approval to establish China’s first real estate investment trust, although this will still be a private offering and not publicly listed and traded
• Even more importantly, the government has allowed real estate developer Zhejiang Xingrun to go bankrupt owing Rmb 3.5bn ($563m).  This was clearly meant as a wake-up call to investors, to encourage them to take responsibility for assessing the credit-worthiness of the bonds in which they invested, and not to assume government would always provide support

A further step also seems likely, following a comment by the governor of China’s central bank that “deposit-rate liberalisation is on our agenda," especially as he went on to add that “I personally think it’s very likely to be realised in a year or two." 

This would be a very important milestone, as it would create proper competition between banks and businesses such as Yu'E Bao.  It would also further reinforce the message that market forces should be playing “the decisive role”.  Lenders will not only have to analyse risks properly, but will also need to allocate more funds to credit-worthy private firms, who are able to pay higher rates than SOEs.

It is also a very aggressive timeframe, underlining the growing urgency of the new leadership with regard to implementing its reform agenda, and overcoming powerful vested interests.

These measures are important first steps in levelling the playing field between the SOEs and private companies.  They will mean that access to capital will become more market-driven, and make it easier for wholly-owned foreign enterprises to obtain onshore funding.  At the same time, the move towards more risk-based pricing for loans will help to promote necessary reform and consolidation in the SOE sector, by identifying the weaker players.

APPENDIX

China’s official and shadow banking systems in action

Source: Quartz, http://qz.com/175590

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About Polarwide: Polarwide is a Hong Kong-based financial and strategic advisory firm advising international companies with their Asian strategy.

Daniël de Blocq van Scheltinga

was the first foreigner to be granted permission to run the finance company of a top-tier Chinese State Owned Enterprise, when establishing and managing ChemChina Finance Company. Previously, Daniël held a variety of senior positions in corporate and investment banking, including as Asia Pacific Head of Chemicals and Asia Head Asset Based Finance for ABN AMRO.

He has lived in Hong Kong for 14 years, and continues to spend much of his time in China, advising both international and Chinese firms, as well as leaders in the public and private sectors. Daniël is a graduate of Leiden University in the Netherlands, holding a Master of Law degree with a speciality of International law.

About IeC: IeC is a London-based strategy consultancy advising Fortune 500 and FTSE 100 companies, investment banks and fund managers.

Paul Hodges

is a trusted adviser to major companies and the investment community, and has a proven track record of accurately identifying key trends in global marketplaces. He has been widely recognised for correctly forewarning of the 2008 global financial crisis. His analysis of the key role of demographics in driving the global economy is now attracting increasing interest from senior policymakers and executives.

Paul is Chairman of International eChem (IeC) and non-executive Chairman of NiTech Solutions Ltd. Prior to launching IeC in 1995, Paul spent 17 years with Imperial Chemical Industries (ICI), both in England and the USA, where he held senior executive positions in petrochemicals and chloralkali, and was Executive Director of a $1 billion ICI business. Paul is a Freeman of the City of London and is a graduate of the University of York, and subsequently studied with the IMD business school in Switzerland

Disclaimer

This Research Note has been prepared by Polarwide/IeC for general circulation. The information contained in this Research Note may be retained. It has not been prepared for the benefit of any particular company or client and may not be relied upon by any company or client or other third party. Polarwide/IeC do not give investment advice and are not regulated under the UK Financial Services Act. If, notwithstanding the foregoing, this Research Note is relied upon by any person, IeC/Polarwide do not accept, and disclaim, all liability for loss and damage suffered as a result.

© IeC/Polarwide 2014