Regulatory Changes Accelerate in China

While a number of markets in the Asia-Pacific region are poised to make regulatory changes in 2010, it’s the combination of the large impacts of recent shifts as well as more adjustments that are expected this year that put China ahead of the pack and potentially on track to reach a tipping point. While many of the developed markets in the region are well ahead in terms of regulatory development and other emerging markets will also make changes, the scope of changes in China looks set to have an effect that exceeds other markets by a large margin.

Several shifts are especially important. For example, since last July, the renminbi trade pilot settlement scheme initiated in Hong Kong and Macau as well as the ASEAN countries has meant that an increasing number of banks outside China can open renminbi accounts for trade clearing. Greater usage of the system and potential expansion to additional countries seem likely to grow renminbi settlement significantly.

In the private equity market, Chinese regulators are promulgating new regulations designed to support the growth of a domestic capital market. Local and international firms alike, including large players such as Blackstone Group and Carlyle group, are setting up an increasing number of yuan-denominated funds in China.

While the number of IPOs fell in much of the world in 2009, China powered ahead by completing 183 deals, the largest number for a single country and 33% of the total of 560 global deals recorded by Dealogic. With high GDP growth expected to continue and with increasing needs for capital, the number of deals in China may well continue to grow even further.

An especially important shift came earlier this month when the China Securities Regulatory Commission announced that it will allow margin trading, short selling and stock index futures, something that some forecasters didn’t expect for at least another five years. Along with expanding the range of tools available for capital markets significantly, these moves will also give ordinary investors more options for their investments.

Infrastructure developments, too, are increasingly supporting these rapid changes. The China Foreign Exchange Trade System (CFETS) launched a new renminbi trading system in December for example, which will enhance risk management and real-time monitoring.

This isn’t to say that all is smooth sailing. Among the challenges, for example, are a yuan exchange rate that remains controversial, and a more difficult environment than other markets for hedging. The Dow Jones report in December, which said that Chinese banks are moving loans off their books by selling them to trust companies raises questions about both contingent liabilities and market transparency. And the legal framework in China is not nearly as developed as in markets such as Hong Kong or Singapore.

Other markets do have significant regulatory adjustments underway too, of course. Japan’s Financial Service Agency is looking at potential regulatory changes in derivatives and other areas. Financial firms in Korea are taking advantage of last year’s Big Bang, even as regulators consider other shifts to increase bank soundness. India and other markets may also make significant changes. Yet it’s the pace of change in China that seems likely to be the game-changer in 2010.


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Dominic Mac