In the News: Fund Custody Opening; Margin Lending Crackdown; and FTZ Reforms Nationwide

Allowing greater access to China's domestic fund custody market was a major part of the phase one U.S.-China trade agreement signed in January. As part of the agreement, China committed to allowing local branches of U.S. financial institutions to provide securities investment fund custody services within five months, and their applications should be dealt with on an "expeditious basis." China also committed to taking the overseas assets of a local subsidiary's parent company into account when assessing whether the asset requirement is met. In October 2018, Standard Chartered became the first foreign bank to secure a fund custody licence for its Chinese subsidiary.

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CSRC cracks down on illegal margin lending platforms

On July 8, the China Securities Regulatory Commission (CSRC) released a list of 258 financial institutions that it says are providing illegal margin lending services to investors. These institutions, many of which use smartphone applications and public WeChat accounts to market their services, provide illicit loans to investors to trade stocks. In a statement, the CSRC said that investors should avoid using unlicensed funding platforms and contact the authorities if they have been scammed.

Margin lending is the practice of investors using the stocks they buy as collateral for the loan. According to Chinese news outlet Caixin, some of these illegal margin lending platforms allow investors to borrow more than RMB1,000 ($142) to buy stocks with a deposit of as little as 10%. The Financial Times reports that margin lending for trading stocks have risen to its highest level in five years in recent weeks according to Wind, a Chinese financial data provider. China has seen a speculative rally in its domestic stock markets lately, leading many retail investors to rush to the market. The Shanghai Composite Index has risen more than 13% since the beginning of July, hitting the highest in more than two years. The apparent bull market also prompts worries of repeating the 2015 fiasco when China's domestic markets rallied to the highest since the financial crisis before a disastrous crash wiped out nearly a third of the value.

According to the recently revised PRC Securities Law (中华人民共和国证券法), only licensed brokerages are allowed to provide securities margin loans in China. In November 2019, the Supreme People's Court emphasized the illegality of unofficial lending services and the invalidity of contracts entered into with unlicensed lenders. The authorities are very concerned about unofficial margin lending because it is widely seen as one of the mains culprits behind China's stock market crash in 2015, when investors quickly dumped their stocks when their value began to fall in order to pay back their loans.

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Sixth batch of FTZ reform measures expanded nationwide

China will roll out nationwide another batch of reform measures trialed in its pilot free trade zones (FTZ). On July 7, The State Council published a circular outlining general plans to expand measures covering five areas: investment management, trade facilitation, financial openness and innovation, operational and post-operational oversight, and human resources. The circular calls on all provincial governments and ministries under the State Council to fully implement the measures.

For each area, the circular lists out several reform projects without providing details of how they will be implemented. For investment management, "green channels" will be established to reform investment management. For facilitating trade, the management of import and export systems will be upgraded, with vehicles and aircraft specifically mentioned. For the financial industry, "green bonds" and "intellectual property securitization" are listed among other projects as key areas for innovation and expansion.

This raft of reform measures is the sixth batch of reforms first trialed in China's pilot FTZs then rolled out nationwide. The Ministry of Commerce (MOFCOM) said on July 10 that 260 reform measures trialed in China's pilot FTZs have been rolled out across the country in the past six years. A MOFCOM official added that 1,151 reform measures have been expanded across the provincial-level regions where the FTZs are located. China has 18 such FTZs across the country. In late June, the National Development and Reform Commission and MOFCOM jointly published the latest Negative List for China's FTZs outlining sectors of the economy restricted to foreign investment. The 2020 List lowers the number of restricted areas from 37 to 30.

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FTZ opening: Special Administrative Measures for Foreign Investment Access in Pilot Free Trade Zones (Negative List) (2020 Edition)

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