Thomas Fang of UBS outlines the development of the structured products market in China, and explains how some of the trends he is seeing indicate the potential opportunities as well as challenges.
Date: Mar 2010
In that year, the China Banking Regulatory Commission (CBRC) relaxed the rule specifying what banks can do under their derivatives licenses to allow stocks and commodities to be included. This opened up new possibilities for product manufacturers, said Fang.
Then in 2006, under the overall Qualified Domestic Institutional Investors (QDII) scheme, Fang said the CBRC opened up the QDII distribution channels, enabling product manufacturers to on-sell structured notes issued by overseas entities.
In 2007 and 2008, China’s regulators spent some time reviewing the structured products market. This led to them putting in place more concrete product and client suitability and approval processes to create a more standardised and international approach, explained Fang.
As a result, he said, financial institutions in China are now better equipped in terms of their product and client suitability processes.
Trends and opportunities in 2010
According to Fang, there is now increasing demand in China for local currency products and the use of local underlyings.
This poses a challenge for foreign players such as UBS, said Fang, because foreign institutions tend to have strengths in global product offerings.
However, through local securities alliances and joint ventures, he said UBS has spent a lot of time on research and development to ensure it can offer local underlyings in the products it sells onshore.
At the same time as clients are biased towards domestic products, in early 2010 the stock market has been volatile, so investors realise they need to protect the gains they made during 2009.
This has led to more demand for emerging market and absolute return-type products, said Fang, which in turn leverages global platforms.
Challenges in China
The trend towards local products is one of the key challenges Fang identified for China’s structured products market.
From a regulatory perspective, although he said UBS is ahead of many international players in China, the bank is still relatively constrained in terms of offering capabilities when it comes to local products.
This is likely to continue to be a trend in the coming years, said Fang, so it is important to work with regulators to try to relax some of the restrictions on foreign players participating locally.
According to Fang, addressing client needs and being client centric is key to success in China.
So to create a sustainable business model, Fang said institutions must be prepared to invest for the longer term. That involves education for all market participants.
This also includes educating the regulators. For example, Fang said UBS has shared a lot of global practices with the authorities.
The key, he said, is being positioned to take advantage of the market when it opens wider.