In the news: Intel signs deal with Chinese chipmakers, the NDRC suspends corporate bonds and the SH-HK stock connect quota worries investors

Intel inks contract with Chinese chipmakers

Intel has invested US$1.5 billion for a 20% stake in two fast growing Chinese mobile chipmakers, Spreadtrum Communications and RDA Microelectronics, which were acquired by Tsinghua Unigroup (a government-affiliated private equity group owned by Tsinghua University) last year for US$1.7 billion and US$900 million respectively. China has made semiconductor development a focus of industrial policy for over a decade and the industry has had a series of cross-border deals during the past year. The deal shows the Chinese government's intention to build a worthy domestic competitor to the likes of Qualcomm and Samsung.

Source:
Reuters

China is the largest smartphone battleground in the world and the deal pushes Intel to catch up to leading mobile chipmaker Qualcomm. The country, despite being the biggest consumer and manufacturer of smartphones, relies heavily on foreign chips, such as those made by Qualcomm of the US, Samsung Electronics of Korea and MediaTek of Taiwan. Intel's deal will be followed by another (to be completed next year) where it will form a new holding company with Tsinghua Unigroup that contains Spreadtrum and RDA. The Chinese government aims to have the companies competitive with MediaTek within five years and overtake Qualcomm within 10 years. Are the heavy remedies imposed on MediaTek's deal with MStar last year and the seemingly-endless investigations and raids against Qualcomm a coincidence or…?

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NDRC halts company bond issuances

The NDRC has stopped accepting applications for new corporate bond issuances this week and it remains unclear when the economic planning agency will resume approving sales. The suspension comes at a time when the government is cracking down on corruption and abnormalities in the securities market. Most bonds which have been approved by the NDRC this year are from local government financing vehicles, and, on October 2, China announced it would ban local governments from additional borrowing through these vehicles so as to control risks to the financial system.

Source:
Bloomberg

The securities market has helped finance over US$100 billion worth of corporate bonds in the first nine months of 2014. But local government debt has increased dramatically over the past few years (the figure stands at around US$3 trillion now), and almost 40% of these liabilities stem from off-budget funding through the local governments' 7,000 plus financing vehicles. The suspension highlights the initiative to strengthen regulation of bond sales by these financing vehicles, and is possibly aimed at preventing a sharp rise in such sales before the new rules take effect.

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SH-HK stock connect investor quota causes concern

Brokers have expressed concerns that too many investors buying on the opening day of the stock connect could leave many at the door. The daily limit is set at Rmb13 billion of net inflows into Shanghai and heavy buying could mean the quota would be exhausted within the first few hours or even minutes. This could halt the trading mechanism and prevent global managers from getting in. Many have said they were wary of investing during the launch due to the uncertainty of being able to get their orders filled. Inflows and outflows should, however, even out.

Source:
The Wall Street Journal

The Shanghai-Hong Kong stock connect launches next month and allows international investors to purchase stocks in Shanghai while allowing those in the mainland to buy stocks listed in Hong Kong. Despite concerns about going over the limit on the first day, shares purchased in China are not allowed to be sold until the next trading day (though existing stocks held by Chinese investors can) meaning no foreign sellers will be on the connect. Chinese investors have bought large numbers of Shanghai-listed shares in anticipation of the launch and officials have released measures to prevent quota-hogging. Hong Kong Exchanges and Clearing chief executive Charles Li has said the quota may be expanded or lifted completely down the line, but this depends on trading performance and investor behaviour, which in turn depends on the clarity of guidelines. Have all the rules been ironed out in preparation for the launch?

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