What China's opening could mean for securities finance (Finadium subscribers only)

In our preparations for a Finadium research report on Asia, we heard several times about the importance of a potential opening of China not only for securities finance markets but world financial markets as well. We think this is a good time for securities finance professionals to get more familiar with what this might mean for their businesses.

The reason for a big impact here is the sheer size of China’s economy and its rate of growth. According to a recent Bank of England article (“Bringing down the Great Wall? Global implications of capital account liberalisation in China,” by John Hooley), “Compared with a 10% share of world GDP and a 9% share of world trade in 2011, China had less than a 3% share of global holdings of overseas assets and liabilities, even when China’s large holdings of foreign exchange reserves are included.” The idea that China could further integrate into the global economy means several new large sandboxes to play in, both for Chinese banks operating internationally and international banks starting to work in Chinese markets.

According to Hooley, China’s economy will have three outsized impacts on global financial markets as the following three factors become (or continue to be) realized:

1) Closing the openness gap, or making the Chinese economy more open for inflows and outflows.

2) China’s outpaced rate of economic growth relative to global GDP.

3) A declining home bias both in China and internationally, with more investors interested and able to do business in other countries.

London, Singapore and Hong Kong have all been competing to be centers for new renmenbi denominated trading activities. Data from the Bank of England shows that Chinese claims on UK banks are roughly US$145 billion, concentrated at HSBC and Standard Chartered; this is about twice as much as Chinese claims on US banks. Presumably however, given the size of China’s economy, there will be substantial assets to go around as China liberalizes its capital controls.

This may be a good time to get familiar with the China Securities Finance Corporation. According to their website, “As the only institution that provides margin financing loan services to qualified securities companies in China’s capital market, CSF aims to facilitate the margin transactions of securities companies in market operation methods, improve China’s margin transactions system, complete the functions of China’s capital market, and promote the stable development of the same.” Currently 11 brokers have access to margin credit lines; it is uncertain how much securities lending business currently goes through CSF, but Bloomberg reported last February that the Chinese government wanted to expand the CSF’s short selling activities.

A good briefing on China also comes from Laura Yao of CITIC Securities. Speaking at the PASLA/RMA conference in March 2012, Ms. Yao provides an overview of the mechanics and players in China’s nascent securities finance market. Her presentation is available here.

For securities finance professionals, these are early days for China’s impact on global financial markets but it is still worth keeping track of new developments. As the Bank of England’s Hooley notes, “If China proceeds to liberalise its capital account over the next decade or so, it has the potential to be a force for growth and stability not just in China but also for the international monetary and financial system.” We agree, and the impacts could be quite massive.

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