Citibank China Co will become the first global bank with a full-service custody operation in China from the new year. This follows its debut as one of only two to go live with securities lending contracts early this month (November 1).
As announced last week, Citi and HSBC both went live with cross-border lending clients for a series of transactions, having gained a specific licence for that earlier. More importantly, Citi gained its onshore custody licence in September and is building its team for a launch early in 2021.
Harry Peng, Citi’s Hong Kong-based managing director and head of markets and securities services for China, said last week that the new licence, including a separate licence for transfer agency (TA), will make it the first for a global custodian bank. The only other foreign bank to as yet obtain an onshore custody licence is regional bank Standard Chartered.
Peng said: “We’re only starting to work on it. As of today, you [foreign companies] can only do cross-border custody, inbound through QFII or outbound through QDII. We’re starting the business next year. We’ve hired about 10 people so far. You have to do that before you get the licence. As the business grows, we’ll recruit more. They have to be put in a segregated area from the existing staff.”
With the TA component of the custody, a separate licence is also required as is the hiring of some trained staff beforehand. Most of the custody clients will be mutual funds, which is the fastest growing part of the Chinese investment management industry. “It’s potentially a very big market for us,” Pend said. “It was worth US$16-17 trillion in 2019. It’s a much bigger and deeper market compared with the QFII business.”
In last week’s statement on the first securities lending transactions, executed on the China ‘A’ shares market in Shanghai, Citi’s Ji Yang, the China head of markets and securities services, said: “We are busy helping a wave of new foreign investors to apply for their QFII qualifications, including more successful applications for qualified hedge funds and private equity funds. Recently we helped a quantitative hedge fund to get its QFII approval, the first of its kind in QFII’s history and another testimony of further China opening-up.”
That relaxion of QFII covers not only securities lending but also margin trading and securities financing, financial and commodity futures, options, private funds. The Chinese authorities have been gradually relaxing foreign investment rules for several years, with the Shanghai market authorities particularly keen to bring in institutional investors and their service providers to help change the investor profile of the Shanghai exchange. The majority of participants are currently individual investors and the exchange has a reputation as a speculator’s market.
Citi opened its first Chinese office, in Shanghai, in 1902, just after the Boxer uprising which ended up costing China the loss of sovereignty over trading ports and significant reparation payments. Interestingly, the US was the only country in what the Chinese refer to as the “Eight Nations invasion” that quelled the uprising which demanded nothing in return from the Chinese. The portion the US received by way of forced reparations went into scholarships for Chinese students to study in the US.
For its part, the colonies of NSW, Victoria and South Australia sent 600 marines to support the British involvement. The NSW contingent was still there on January 1,1901 when Australia became a nation. The then monarch, Queen Victoria, sent each of them a packet of Woodbines and a photo of herself for their celebrations.
Greg Bright is publisher of Investor Strategy News (Australia)