In the news: China cracks down on foreign non-profits, SOEs face stricter lending and the HK-Shenzhen Stock connect launches in late 2015

China raises pressure on foreign non-profits

Two foreigners have been quietly forced to leave China as the country raises pressure on foreign non-profits. Current rules prohibit foreign civic groups to register as non-profits and legally employ people. This has led some to register as for-profit businesses to gain access to visas or work in sensitive areas under an uncertain legal status. The National People's Congress is considering a proposed law that gives police authority to manage these foreign groups. The number of Chinese civic groups has increased dramatically over the years, and such events indicate the government's tolerance for activism is waning. Although China claims the new draft law will benefit foreign groups by legalising their status, restriction appears to be a key consideration. The law will give the Ministry of Public Security the authority to register foreign groups and monitor their activities. Many groups are likely to be kicked out and those that do get registered will be subject to extra layers of control.

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Foreign banks tighten lending to SOEs

Banks such as Singapore's DBS and Taiwan's Chang Hwa Commercial Bank are adopting stricter lending criteria for China's SOEs. DBS recently suffered a loss on a bad loan to an SOE-related firm it had assessed as risk-free and plans to launch a decision grid to assess the creditworthiness of SOEs. Chang Hwa said it will now only lend to SOEs that provide collateral. These changes reflect a broader trend among foreign banks to tighten lending in China as more defaults occur. More banks will also demand collateral so they can recover some value when loans go bad – Standard Chartered increased its collateral level by 4% this year. This could turn out to be a good thing for China's SOEs, at least for those interested in getting an independent test of their creditworthiness. Given a relatively easy run so far by government-controlled lenders and malleable rating agencies, assessments by foreign banks will give a clearer picture of what the market thinks of these monoliths. Some may come out winners. Or not.

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PRC Regulations for the Administration of Foreign-invested Banks (2nd Revision)
Circular on Revising the Control Policies Relevant to the Entry into the Interbank Foreign Exchange Market by Financial Institutions
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Hong Kong-Shenzhen Stock Connect to debut later this year

Shenzhen Stock Exchange chief executive Song Liping said the scheme linking the bourse with Hong Kong will debut in the second half of this year as regulators will soon grant approval. The Shenzhen-Hong Kong connect scheme will have the same quota as the Shanghai-Hong Kong programme and the capital requirement for mainland investors to qualify will also be unchanged at Rmb500,000 per individual. The link will allow Hong Kong investors to gain access to the SME board and the ChiNext market, where hundreds of small firms and start-ups are traded. The anti-climax of the Hong Kong-Shanghai stock connect reflected that, for the most part, investors had limited information about many Shanghai-listed companies. Will this be the case for the much smaller companies in Shenzhen? In any case, the new scheme will diversify trading in Hong Kong, which is heavy on financial institutions and insurance companies and could use more tech and start-up firms.

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Factors for capital markets growth
Measures for the Administration of the Operation of Publicly Offered Securities Investment Funds
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A new investment system – Guangdong Focus