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Wisdom to nurture ambition, data to enable the future – 2021 China Financial Market Forecast

Nicole Chen
Nicole Chen
Managing Director of the Data and Analytics business for the London Stock Exchange Group in China

On February 1, Refinitiv officially merged with the London Stock Exchange Group (LSEG). On behalf of our Chinese colleagues at LSEG, I would like to wish all our friends of LSEG and Refinitiv a happy, healthy, and prosperous Chinese New Year.


2020 was indeed a difficult year. The COVID-19 pandemic severely impacted everyone around the world. Thanks to effective prevention and control measures, China continues a strong recovery in the fight against the pandemic and has accumulated useful experience for the global fight against it. China was also the only major economy with positive GDP growth worldwide in 2020.

Source: Refinitiv Datastream/Fathom Consulting
Source: Refinitiv Datastream

Alongside the global rollout of the vaccine,  China’s rapid economic restart will continue in tandem with global efforts to fight against the pandemic.

Source: Refinitiv Eikon
Source: Refinitiv Eikon
Source: Refinitiv Eikon

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To support our economy, China’s central bank has been very disciplined in directing funds precisely to industries and SMEs severely affected by the pandemic as the situation improved, stabilizing employment and resuming production to ensure the stability of society, the recovery of production, and stable price levels.

Source: Refinitiv Datastream
Source: Refinitiv Datastream

After a difficult period at the beginning of the pandemic, the year-on-year growth rate of China’s exports have continued to rise since May 2020 and ended the year at a new high since February 2018. China’s highly resilient manufacturing sector has withstood an exceptionally tough test during the restructuring of global supply chains as a result of the trade war and pandemic.

China’s International Trade. Source: Refinitiv Datastream

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China has deepened international cooperation and policy synergies, and continued to promote financial market opening amid the global pandemic.

Competition between the U.S. and China has triggered a wave of U.S.-listed Chinese stocks returning to home markets.

In the game of the century, the two countries have escalated competition from trade and technology to the financial sector. Affected by the U.S. Holding Foreign Companies Accountable Act and sanctions against Chinese listed companies in the U.S., such Chinese stocks, including BAT (Baidu, Alibaba, Tencent), have expressed their consideration of returning home, in particular, with the option of a secondary listing in Hong Kong.

As of the end of 2020, 10 U.S.-listed Chinese stocks have pulled off secondary listings on the Hong Kong Stock Exchange, raising a total of more than HK$230 billion. In addition, well-known names such as Baidu, Tencent Music, and Ctrip are also lining up for secondary listings in Hong Kong.

Source: Refinitiv Eikon

Accelerated financial market opening

The easing of investment quotas and restrictions for foreign institutional investors demonstrates China’s determination to accelerate its financial opening to the world, and its progress continues to exceed expectations. A growing number of overseas financial institutions have expanded their presence in China.

Fitch has become the second international ratings agency to enter the Chinese market after S&P. Goldman Sachs, Morgan Stanley, Credit Suisse, and other foreign financial institutions now hold controlling stakes in their joint securities businesses in China, and American Express has obtained a license for bank card clearing for its joint venture in China.

With an announced timetable for the inclusion of Chinese bonds in internationally renowned bond indices, foreign investors have enthusiastically increased their holdings of China’s domestic bonds.

Foreign holdings of Chinese bonds (RMB billion), Shanghai Clearing House. Source: Refinitiv Datastream

Building a new development pattern and promoting free investment and trade facilitation

China has successfully concluded the Regional Comprehensive Economic Partnership (RCEP) agreement as well as completing negotiations on the China-EU Investment Agreement in December. China and the EU have reached a consensus on high-level openness in terms of market access, fair competition, and business environments, which will help unlock new dividends in China-EU trade and boost economic growth of both economies.

The key agreements that China has reached with its first and second largest trading partners have far-reaching implications, giving rise to confidence in the future prospects of extensive global economic and trade cooperation and financial investment.

China delivered strong results amid turbulent financial market conditions

In 2020, Chinese equity and equity-linked proceeds raised a total of U.S.$281.6 billion, up 90.4% from 2019. It was the most active year for China’s equity capital markets since 1990.

IPOs have cumulatively raised US$125.3 billion, up 86.0% year-over-year, with the number of IPOs up 66.3% over the previous year. It was the strongest year for IPOs in China across the last three decades. Follow-on offerings also grew significantly, raising US$105.8 billion, a year-over-year increase of 238.7%.

China Equity Capital Market Issuance. Source: Refinitiv Eikon
China Equity Capital Market – Breakdown of Issuers by Industry. Source: Refinitiv Eikon

In terms of focus for 2021, the China Securities Regulatory Commission pointed out that it will further improve the capital market, including expanding the scope of the registration-based IPO system. We look forward to the improvement of the supporting systems and rules of China’s capital market and its active initiation to create favorable conditions for the steady advancement of market-wide registration-based system reform.

In 2020, the total amount of M&A transactions involving China reached US$581.3 billion, up 30.1% from 2019 and the highest level since 2017.

Among them, China’s outbound M&A transactions totaled US$37.1 billion, a year-on-year decrease of 15.1%. China had a total of 113 M&A transactions in countries along the “Belt and Road” with a total value of US$8.3 billion, a year-on-year decrease of 33.7%, and accounting for 22.3% of China’s total overseas M&A transactions.

The volume of acquisitions of Chinese businesses by foreign companies reached US$44.8 billion, a year-on-year increase of 4.3%. It was the highest level of Chinese inbound M&A activities since 2018.

China’s total domestic M&A transactions reached US$478.5 billion, up 38.8% year-on-year, and the number of transactions increased by 2.9%.

Announced Cross-Border Transactions Involving China (Left); Announced Cross-Border Transactions Involving China – Breakdown of Target Companies by Industry (Right). Source: Refinitiv Eikon

Promoting green finance to support and build a new development pattern

As President Xi Jinping said, the Paris Agreement to address climate change represents the general direction for a global green and low-carbon transition, and all countries must take decisive steps in pursuing these goals. China mentioned in September 2020 that it will strive to achieve carbon neutrality by 2060, which means that during the 40 years from 2020 to 2060, China will reduce its carbon emissions from 16 billion tons per year to almost zero.

As of December 31, 2020, there were 317 outstanding green bonds issued in the Chinese market, with US$91 billion in issuance. This represents 10.9% of the total number (2,883) and 9.4% of total issuance amount (US$973.2 billion) of green bonds around the world, second only to the U.S. and France, and 2.5 times the fourth-ranked Germany.

At the end of 2020, with the rapid development of environmentally friendly electric vehicles, China’s three EV companies, NIO, Li Auto, and XPeng Motors, saw skyrocketed market values. Together with BYD and SAIC, they occupy half of the top 10 listed automotive companies in the world by market value.

Source: Refinitiv Eikon

2021 China Financial Market Forecast

The introduction of many regulations on foreign institutional investors have not only greatly facilitated the capital exchange operations of international institutions, but also broadened their investment scope to include the National Equities Exchange and Quotations (NEEQ), private equity investment funds, financial futures, commodity futures, options, bond repurchases, and securities margin financing.

In the future, China will further attract international institutions to invest in China.

While bringing in foreign investment, China will also expand its exploration of outbound investment and promote two-way opening of capital accounts. In 2021, China will expand the scale of a pilot scheme of qualified domestic limited partnership (QDLP)/investment enterprise (QDIE) in Shanghai, Beijing, and Shenzhen. At the same time, QDLP pilot programs will also be carried out in Hainan Free Trade Port and Chongqing to support the economic development of both places.

Following QDII and the stock connect mechanism, the QDLP/QDIE pilot programs will improve homogenized products and increase channels in China’s domestic wealth management market.

“Cross-boundary Wealth Management Connect” will provide high net worth individuals with more global asset allocation options, including international hedge funds, private equity funds, overseas secondary market public funds, and real estate investment funds (REITs).

International capital is competing for RMB assets

Data as of February 5, 2021. Source: Refinitiv Eikon

The exchange rate of the RMB against the U.S. dollar on the first trading day of the new year got off to a good start, rising by 1.1%. As of February 5, the U.S. dollar index rose by 1.19%, and the RMB was the only currency that appreciate against all major currencies this year including the U.S. dollar and gold, showing that international capital favors the RMB.

Data as of February 5, 2021. Source: Refinitiv Eikon

The SSE 50 and Hong Kong Hang Seng Index, which represent China’s top-quality listed companies, have seen strong performance and market capitalization growth this year, gaining traction over developed market benchmark stock indices such as the NASDAQ 100 and S&P 500 in the U.S.

Increasing investor demand for China data and information

China’s 14th Five-Year Plan and 2035 Vision stated that it will “accelerate the dual-cycle development with the domestic cycle as the mainstay and the domestic and international cycles reinforcing each other.” Premier Li Keqiang proposed to speed up the construction of new infrastructure such as information networks.

In addition, the concept of “focusing on demand-side reforms” was proposed for the first time.

With the increasingly complex game between China and the US extending to various playing fields, it is important to activate domestic demand and recreate a new economic engine by replacing old infrastructure with new infrastructure. This has brought huge business opportunities to many companies at home and abroad. In particular, international investors who are bullish on China’s huge market will continue to increase their demand for information and data about China.

China’s domestic financial institutions that serve the real economy can also practice digital transformation along the way. With the development of 5G, big data centers, artificial intelligence, and other fields in the new infrastructure, financial institutions can strengthen cooperation with third-party professional institutions under the condition of improving and mastering core capabilities of risk control to build infrastructure and organizational structure, provide cross-market and multi-asset class financial products in line with the future model of digital financial industry, and carry out around-the-clock, scenario-based, and personalized services.

It will bring opportunities for international companies that have long cultivated the Chinese market and are patiently seeking strategic opportunities to integrate knowledge with action for steady growth.

RMB internationalization brings new opportunities

The internationalization of the RMB continues to gain traction. The RMB has long ranked as the 5th or 6th position in SWIFT’s ranking of currencies by transaction volume. With China’s foreign trade resurgence in the pandemic era and the appreciation of the exchange rate of the yuan, the share of RMB usage in global transactions will surely increase further.

SWIFT Global RMB Usage and its Global Ranking. Source: Refinitiv Eikon

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With the help of the RCEP signed with Asia-Pacific countries, China is expected to consolidate its position as a major trading country in East Asia and the Pacific as well as strengthen its trade partnership with Japan and South Korea.

As the China-EU investment agreement comes into effect, we expect it will further promote the liberalization and facilitation of international trade and investment and create a favorable external environment. The role of multilateral and bilateral investment promotion mechanism can further facilitate and protect foreign investment and further strengthen the protection of the legitimate rights and interests of foreign investors for an increasingly market-oriented and law-based international business environment.

Strengthened compliance management and international investment cooperation toward standardization

According to a report released by the People’s Bank of China in August, the cross-border use of the RMB remained resilient and showed growth against the backdrop of the COVID-19 pandemic which hit hard on global trade, finance, and economy. The RMB’s position in the global financial market has significantly improved, and the currency’s international functions have continued to expand and strengthen, highlighting the market appeal of an emerging international currency.

In recent years, more companies have chosen cross-border RMB business as a means to hedge exchange rate risks. In addition, streamlined settlement process, reduced settlement costs, and corporate financial accounting and capital management convenience are also among the main reasons for companies to choose cross-border RMB business.

Then in September, China’s Central Bank and other ministries and commissions issued the Notice on Further Optimization of Cross-Border RMB Policies and Support for Stabilization of Foreign Trade and Foreign Investment, which promoted higher-level trade and investment RMB settlement facilitation, relaxed restrictions on the use of RMB income for certain capital accounts, and carried out nationwide pilot programs on higher-level trade and investment facilitation.

China will also further facilitate the implementation of policies on cross-border remittance of legal and compliant income such as personal salaries.

IMF: RMB Foreign Exchange Reserve Volume and Share.
Source: Refinitiv Datastream
IMF: RMB Foreign Exchange Reserve Volume and Share. Source: Refinitiv Datastream

The RMB is currently the eighth largest foreign exchange trading currency, the fifth largest international payment currency and reserve currency, and the third largest trade financing currency.

As seen from the data released by IMF, the volume and share of RMB as a reserve currency has further accelerated since Q1 2020. The trade war has actually helped significantly to boost the RMB’s position in the international reserve currency.

In the process of RMB internationalization, Chinese companies are also faced with increasing compliance challenges from relevant national government agencies and international rules in international engineering, commerce, and financial services. The rigid compliance requirements of anti-money laundering, anti-terrorist financing, and personal information protection have made all Chinese companies that intend to make profits overseas to increase their investment in risk control. This trend has taken shape and will become increasingly evident as China opens up more to the world.

Being at the forefront of digital currency

In addition to the explosive market for blockchain cryptocurrencies, major central banks around the world are now committed to the research and development of sovereign digital currencies. Last August, China carried out DC/EP application pilot programs in Shenzhen, Chengdu, Suzhou, and Xiong’an.

By promoting sovereign digital currencies, central banks can not only reduce the cost of money printing, but also strengthen anti-counterfeiting and supervision, and facilitate the implementation of monetary policy. It will help achieve the goal of “eliminating clearing,” strengthen the RMB’s voice in the global currency system in the competition with LIBOR, USDT, and other digital currencies, and facilitate the RMB internationalization process amid headwind.

On January 16, 2021, China National Clearing Center, the Digital Currency Research Institute of the People’s Bank of China, Cross-Border Interbank Payment System (CIPS), Payment & Clearing Association of China, and SWIFT’s Hong Kong subsidiary jointly established Finance Gateway Information Services Co. The registered capital is EUR10 million, with SWIFT holding 55% controlling shares.

With the help of digital technology, the RMB will find an unprecedented new path on the road to internationalization. At the same time, we will also see more blockchain-based digital currencies and sovereign credit-based digital currencies to have more breakthroughs in 2021.

Conclusion

We believe that “Open Makes More Possible,” especially in today’s world. Openness means open access for our customers, and it is the philosophy and long-standing tradition that runs through both Refinitiv and LSEG. As the world’s leading provider of financial market infrastructure and data, the combined LSEG will continue to build a global multi-asset class capital market business.

In this time of transformation and global challenges, we are committed to growing together with you, with an open mind, transparency, and sincerity.

We look forward to joining hands with you in 2021, the year of the Ox and a year of “bullish” prospects, staying true to our original mission without fear of hardship, and making progress together.

Identify trends, generate and test hypotheses, and develop viewpoints and research. Loaded with 70 years of information, Datastream is the world’s most comprehensive financial time series database.