Insight archive for Margaret Harwood-Jones | Standard Chartered

China investment: a new age of open access

Margaret Harwood-Jones — Fri, 04 Jan 2019 11:47:05 +0000

Since China began opening up its capital markets in 1992, the country’s concerted approach to liberalisation has gradually won the confidence of international investors.

The latest example of China’s commitment to financial reform is the awarding of a domestic fund custody license to Standard Chartered – the first foreign bank to be granted such a license. This is a significant development as it marks another step towards welcoming foreign investors to the world's third-largest equity and bond markets, with a combined worth of nearly USD20 trillion.

With investor interest in China growing, Chinese authorities have launched measures to help smooth the process, with several more in the pipeline. Below are some of the latest milestones in the journey to a more open and equal market system in China.

Standard Chartered receives domestic fund custody license

The China Securities Regulatory Commission (CSRC) granted a domestic fund custody license to Standard Chartered Bank, allowing it to directly access domestic funds and provide custodial services for investors in China.

Bond Connect enhancements

To further enhance the appeal of Bond Connect, an access scheme launched in July 2017 to facilitate foreign investment in the China’s interbank bond market, Chinese regulators announced a series of enhancements, including real-time delivery-versus-payment and block trade allocations.

Three-year tax holiday for overseas investors in onshore bonds

To attract more overseas institutional investors into China’s USD11 trillion bond market, a three-year tax holiday was introduced, exempting overseas investors from paying Withholding Tax and VAT on interest from their onshore bond investments between November 2018 and November 2021.

London-Shanghai Stock Connect launch expected

This access scheme, which will allow investors in China and abroad to trade depositary receipts of listed companies, will be a big boost to Chinese companies expanding their business abroad when it is launched later this year.

In addition to the above, we anticipate further efforts to streamline the application process for the various China access schemes. In the near future, we also expect the introduction of futures and options products, as well as new hedging tools, which should entice more overseas participation in China’s capital markets.

Near-term challenges

The renminbi’s (RMB) recent depreciation could impact foreign investors’ appetite for RMB assets, while forcing domestic investors to hedge risk overseas. But investor confidence is expected to sustain if the currency holds its ground.

China’s debt, at 299 per cent of GDP (up from 171 per cent in 2008) is another obstacle to growth. Mindful of this, Beijing is reining in over-lending while working to encourage domestic consumption and reduce the economy’s dependence on exports. This can also shield growth from the worst effects of the trade war with the US.

An inclusive future

China’s long-term outlook remains robust. Sectors such as technology, transportation and consumer services, which have capitalised on local wealth creation, are the new growth drivers, and are predicted to grow by USD10 trillion to USD39 trillion by 2022.

Encouraged by this growth, and improvements to access channels, investors are enthusiastically accessing China. It is estimated that overseas investors could bring USD400 billion of equity flows into China over the next 10 years.

"China is well placed to secure for its markets and currency a position more in line with its status as the world's second-largest economy"

China also saw large investments in its government bonds in 2018, and the expected full inclusion of Chinese bonds into global bond indices is predicted to attract flows worth USD286 billion, with foreign ownership of onshore bonds set to rise to as much as 7 per cent by end-2020, from under 2 per cent in early 2018.

These developments are essential for China, given the competition from other developing jurisdictions for foreign investors’ cash. Of course, for China, domestic considerations remain the primary drivers and will dictate the pace of further liberalisation. To that end, following the addition of the RMB to the IMF’s Special Drawing Right basket, Beijing has set its sights on making the yuan a global reserve currency.

However, to achieve this, China needs a transparent monetary policy and currency management system, and sizeable domestic capital market that’s easily accessible to overseas investors. Recognising the work to be done in this regard, the CSRC is promoting local capital markets while the People’s Bank of China is reforming the interbank market and facilitating RMB-denominated debt.

As China works to enhance market participation, and gain wider acceptance and recognition on major world indexes, it is well placed to secure for its markets and currency a position more in line with its status as the world’s second-largest economy. This makes it possible to envision a scenario in which overseas investors will enjoy the same accesses and rights as their domestic counterparts, even if the path to such a scenario will be gradual.

China investments enter a new era

Margaret Harwood-Jones — Fri, 22 Jun 2018 09:15:06 +0000

There have never been more foreign investors investing in China, as general optimism about the market has been boosted by the availability of clearer, simpler access channels.

This file opens in a new windowAre you maximising China's potential? Download our report

Now in its third year, our annual renminbi (RMB) survey of investors, regulators and custodians across Asia, Europe and North America shows that investor confidence about China is at its most bullish since we launched the survey in 2016, with more than four in five (88 per cent) of respondents now investing in China, up from more three in five (67 per cent) in 2016.

Based on responses to our 2018 renminbi survey of investors

And positive investor sentiment is no longer concentrated in the traditional renminbi (RMB) hubs of Hong Kong and Singapore. North America has emerged as one of the most positive markets, with three quarters (78 per cent) of respondents investing in China and an overwhelming majority (87 per cent) looking to increase their exposure over the next 12 months.

Infographic: How investors view China

As well as overall optimism, the latest survey shows that we are starting to see investor priorities shifting, with concern over regulation giving way to more practical considerations such as access to funding and account opening. This shift has been driven by the two issues that have dominated China investment this year: new access schemes and index inclusion.

The Connects are accelerating China investment flows

The launch of the Bond Connect programme in July 2017 and continued enhancements to the Stock Connect programme have provided investors with two channels that provide a clear operational framework and swift application approvals.

By reducing concerns over safety and transparency, the mechanisms are attracting fresh interest. Both Stock Connect and Bond Connect have become core investment channels, with almost half (48 per cent) of respondents planning to use Stock Connect for future investment – up from one in five (22.3 per cent) last year – and almost a quarter (23 per cent) expecting to use Bond Connect, which has only operated for less than a year.

"For most investors, it seems the decision about whether to invest in China is no longer a question of it, but how"

Margaret Harwood-Jones Global Head, Securities Services, Transaction Banking

That said, the Connects still do not offer all the risk management tools investors require, such as the ability to hedge and delivery versus payment. These omissions continue to hamper take-up from jurisdictions with stricter regulatory oversight. For this reason, access mechanisms such as the Qualified Foreign Institutional Investor (QFII) programme and the Renminbi Qualified Foreign Institutional Investor (RQFII) programme still have a role to play in investors’ China toolbox.

Index inclusion drives market development

Meanwhile, the inclusion of China’s A-shares into the MSCI Emerging Markets Index and the proposed entry of onshore bonds into the Bloomberg Barclays Global Aggregate Index are spurring market enhancements, as regulators and markets act to meet the inclusion criteria. Our survey suggests that index inclusion is already impacting investor behaviour, with 44 per cent of respondents investing before rebalancing.

However, there are still issues that China’s regulators need to address. At our recent roundtables with clients, it was clear that the number and variety of access schemes is starting to weigh financially and operationally on investors, custodians and regulators. Rather than welcoming further new schemes, such as the upcoming London-Shanghai Connect, the industry’s preference is for harmonisation across the existing access channels.

But for most investors, it seems the decision about whether to invest in China is no longer a question of if, but how. If the country’s regulators can iron out the remaining roadblocks, a new era of Chinese investment could really take off.

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Staying one step ahead of cyber crime

Margaret Harwood-Jones — Wed, 12 Jul 2017 08:00:08 +0000

"Collaboration and business-wide education about cyber security is key"

Laws and regulations on cyber crime lack the harmonisation and coherence to deter attacks at scale. Organisations that have been hacked are often punished for failing to meet the required standard of care, while the perpetrators escape justice.

Harmonised regulation is vital

Cyber threats are fast-moving and becoming increasingly sophisticated, and policy makers are determined to take action. The European Union, for instance, recently passed legislation to increase critical infrastructure capabilities to combat cyber crime through the Network Information Security Directive, which will come into effect in 2018. This applies to what policy makers refer to as ’operators of essential services’, which includes financial firms.

However, if regulation is not harmonised, financial firms will have to implement different solutions in the different markets in which they operate, causing unnecessary complexity, risks and costs to the industry.

Global standards – such as those laid out by the US National Institute of Standards and Technology – though not necessarily required by regulation, are a good foundation for organisations to base their cyber security programmes on.

"There needs to be cultural change that embeds cyber security as every employee’s responsibility"

Cyber crime is on the rise, as seen only recently with computer virus Petya spreading disruption to companies across the world, in the wake of the global WannaCry ransomware attack in May.

Financial institutions are particularly vulnerable to attacks. A recent report by Symantec found that banks and other financial firms in more than 30 countries were targeted in a spate of attacks in which USD81 million was stolen.

Disruptors such as blockchain, artificial intelligence and machine learning are becoming more prominent, but the industry still has a limited understanding of these technologies, and innovation often outpaces developments in cyber security.

The financial services industry traditionally relied on manual business processes, but as these become digitised and new technologies take root, firms must invest more in cyber security.

What we can do

Despite the rising threat, the financial industry is not helpless, and firms can do a lot to find solutions. Collaboration and business-wide education about cyber security is key.

There needs to be cultural change that embeds cyber security as every employee’s responsibility. Meanwhile, firms need to work with regulators to implement and contribute to best practices, and ensure their governance structure is fit for dealing with cyber risk, and that they employ the right information security professionals.

Cyber security is a significant threat, but through promotion of a healthy security culture, supported by the right tools, policies and procedures, financial institutions can strengthen their defence.

Download a copy of our free report ‘Strengthening responses to cyber crime in financial services’ for more on how to mitigate the rising threat of cyber crime.

Emerging markets: attractive if you know where to look

Margaret Harwood-Jones — Fri, 07 Jul 2017 08:00:50 +0000

Investing in emerging financial markets can be a frustrating experience. Investors have frequently made what looked like fantastic returns, only to find themselves trapped as markets crash.

Yet, emerging markets continue to look compelling as an investment opportunity, judging by the confidence of the asset managers I met at a recent roundtable.

"Emerging markets have evolved and now offer more diverse opportunities"

Emerging markets have driven the lion’s share of global economic growth for decades, and their combined economies now represent around half of global GDP, though still less than 10 per cent of global market capitalisation.

Confidence is high for these reasons, but emerging markets are also attractive as they have evolved in recent years and now offer more diverse opportunities and ways to manage risk.

Changing for the better

From the asset managers I spoke to, it was clear that one of the big changes in emerging markets over the last 10 to 12 years has been the development of local-currency bond markets. This has opened up a whole world of investment opportunities, adding multiple dimensions to trading, which is no longer just about the risk of sudden default.

In fact, there is now a sense that in the current political climate, it’s actually developed markets that are the focus of political risk, while their emerging market counterparts have become more stable.

Currently, many Standard Chartered clients are very interested in India, attracted by the political stability and reform agenda. Interest in China is also high, and we think continued liberalisation will bring more investment flows into the country.

Another positive trend that’s creating interest is the emerging affluence in many of these markets, boosting spending in local economies.

One size doesn’t fit all

However, you can’t just make a one-size-fits-all judgement on such a diverse range of markets, many of which are subject to sudden and rapid change. Clearly, for investors it pays to be vigilant. In the forex market in Malaysia at the end of last year, for example, there was nervousness around speculation. So at a moment’s notice the regulator imposed tighter reporting requirements, which brought the whole market to a standstill.

Tax is another potential pitfall. It’s possible in many regions for local tax authorities to rollout new requirements for capital gains at very little notice. Investors need a constant tax screen to identify potential risk in this area.

"Many investors are willing to take the chance on emerging markets"

Many other operational challenges remain, influenced by regulation, market structure, counterparties and governance, and often there is a lot of work required behind the scenes to make a success of emerging market investment.

As a large international bank working in these markets, we have been trying to bring institutional investors, regulators and exchanges closer together to foster an environment more conducive to attracting international investor flows, and this kind of approach is now becoming more widespread.

Despite the challenges, many investors are willing to take the chance on emerging markets. And, with a selective approach, and the right preparation and risk management, it’s a strategy that can pay dividends.

For more on how investors are minimising emerging-market risk, read our report ‘Emerging markets: seizing the opportunities'

Blockchain – the road to mass adoption

Margaret Harwood-Jones — Thu, 16 Jun 2016 07:29:38 +0000

It’s long been argued that blockchain – the underlying DNA of cryptocurrency Bitcoin – could transform the way financial services companies do business, but how close is it to being used day-to-day?

When it comes to some aspects of the financial services industry, adoption is still a little way off.

There’s no doubt that blockchain’s real-time characteristic and ability to act as a public ledger of all transactions could revolutionise many parts of financial services, reducing risks and bringing cost savings among other benefits.

Santander estimates that using blockchain to streamline cross-border payments, securities trading and regulatory could generate cost savings of between USD15 billion and USD20 billion by 2022.

But for blockchain to play a significant part in areas such as central counterparty party clearing, trade settlement, collateral management, regulatory reporting, and corporate actions, it must first overcome some operational and regulatory challenges.

The key to blockchain’s success

In a new report, we explore whether blockchain could disrupt the European Central Bank’s (ECB) Target2Securities (T2S) project, which aims to standardise European cross-border trade settlement by integrating securities and cash accounts onto a single IT platform. Some people have suggested that blockchain could play a material role in T2S, or even replace it.

Blockchain’s benefits, such as real-time settlement capability, reducing counterparty risk and enhanced automation, could certainly disrupt T2S. However, right now it’s unclear if the disruptive technology could cope with European markets’ high transaction volumes.

The ECB estimates that daily T2S peak volumes will reach 4.7 million transactions with a value of approximately 10 trillion to 15 trillion euros. By contrast, daily transactional volumes in Bitcoin total around 250,000 with a value of just USD257 million.

This file opens in a new windowBlockchain and T2S: A potential disruptor

Blockchain’s success will also be conditional on a smooth integration with legacy technologies – the costs of getting this wrong could be high. And in an increasingly digital world, it’s vital that blockchain proves to the market that it is secure from cyber-attacks.

Nobody can deny that blockchain has the potential to impact markets globally, including emerging economies which are in the early stages of developing their market infrastructures.

But distributed ledger technology – should it truly take off – is likely to take years to come into fruition, simply because it will require harmonised standards and regulation agreed by the industry securities services industry, regulators and governments. The scale of this challenge should not be underestimated.