For us, the issue is that historically we didnÆt have enough focus on what is going on in China. As we began to talk more and more to the regulators, the central bank, the people running the foreign exchange markets, and those looking to establish some basic standards for the securities markets, we realised the opportunity is huge. The knowledge of SWIFT in this market is low and the only way weÆre going to help put forward the interests of our members is to get more resources into China.
We had an office in Beijing with a handful of people, but weÆve moved into new premises and we are now expanding the office. WeÆre adding more staff and we hope this will give us the capacity to provide more coverage and that we will be able to engage more with the community in China, which we believe has huge potential.
In China, what activities has the securities industry division been involved in previously?
WeÆve not done much, primarily because there is not much of a securities market. We have a number of fundamental issues that we have to deal with around the lack of full convertibility of the currency. We also see issues around the rights and protections for foreign investors. There is very little liquidity because, for the most part, the primary assets of China are still owned by the government. As that privatisation process continues and as the currency moves to full convertibility, we anticipate that there will be a much larger amount of cross-border activity in China.
As QFII and QDII get bedded down, there will more opportunity for us. I just came from Beijing and Shanghai and we got a lot of encouragement from the regulators and central bank and from the broker dealers to help them move forward with the development of standards for the securities market. We look at it as a huge opportunity. China has a unique chance to leapfrog the learning curve of many of the other emerging markets by going back and looking to see what worked and what didnÆt work. One of those things that is clear - and is a short-term opportunity and a long-term liability - is the development of different standards for cross-border transactions and domestic market transactions. We spent a lot of time talking about the benefits of building a single standard from the outset for both cross-border and domestic, which improves liquidity and fluidity in the marketplace. STP in the marketplace keeps the cost down and makes it a lot easier for QFII and QDII to work well. We hope these discussions bear fruit and that we can work with the business to hopefully create a single market standard for China.
You mentioned QDII, what to you think is the likelihood of a pilot programme happening this year?
I think what weÆve seen and talked about is that QFII and QDII - specifically as it is the newer one - needs a bit more clarity of definition before you can anticipate what is going to happen. China is sitting on anywhere between $750 billion and $1 trillion in US assets and we do not expect a tidal wave of money to flow out of the country as a result of QDII.
However, what we do expect is some increase of diversification of the asset base of individuals and financial institutions on behalf of the individuals. We expect that diversification to lead to prudent market activity outside of China. QFII and QDII are constrained to a certain degree by an amount that the government is willing to define as eligible. It is not a huge sum of money at the outset, but it is certainly a promising example of the continuing opening of the market.
What is SWIFT doing in the China investor space?
WeÆre working with them and because that market is not terribly robust, it is more about building the platform and framework for the market when it actually starts to open up. The risk to any marketplace is a spike in volume when youÆre not prepared. If you donÆt have standards in place, and you donÆt have the capacity to deal with the transaction volumes, you run the risk of having those transaction volumes not settled and cleared properly and the risk to investors is pretty large.
What weÆre doing, since the securities transactions are only a small part of SWIFTÆs business in China, is having the collective luxury of building a system with them. These are very bright people that have studied the capital markets thoroughly and what they recognise is that they have to be prepared and they all anticipate that is going to increase in volume and value. As liquidity becomes more obvious and the convertibility happens, we believe that if they continue in the path theyÆve discussed with us, China will be prepared. Since the initial flows of capital will always come from the larger offshore investors who already use SWIFT as their communication base, they are going to look for the same capability when they move into China. If the Chinese are as keen to attract foreign capital as they say, it is probably a very prudent idea for them to adopt the international standard of ISO.
Within QDII, do you see any scope for the use of alternative investments and structured products?
Sure. Although the definitions of QDII need to be made clearer, it is not limited to any particular asset class at the moment. The local China institutions that will qualify for QDII will look at the opportunity in the asset classes outside of the country and then make their decisions. China isnÆt burdened by the same issues of the moment like more mature Western markets where hedge funds and more sophisticated instruments are being created to meet the increasing need for return on the assets to fund the retirement of the baby-boomers. The Chinese donÆt have that issue yet and their needs are diversification to manage risk, yield through conservative investments and IÆm sure theyÆll put some assets into the structured space. But I donÆt foresee that Chinese investors will rush out and disrupt the alternative space.
What are some of the agendas you plan to cover at Sibos 2006?
WeÆve got Gerry Corrigan, the former head of the New York Federal Reserve Bank, who is now a managing director at Goldman Sachs. Last July he came out with The Corrigan Report which focused on the state of affairs in the alternative investments and hedge funds space and that report received quite a bit of attention from both the industry and the regulators. After it was released, a number of hedge funds and prime brokers were invited to come in for a little chat by the New York Federal Reserve Bank. HeÆs going to talk about risk in an evolving capital market for complex securities.
We also have some special sessions around the evolution of the securities market in China. We also have a couple of sessions on alternative investments, which will be panel discussions. Also, there will be a session on corporate actions and how SWIFT is moving to create more throughput, electric communications and STP in this field and move away from paper. Masamato Yashiro, who used to be the chairman of Shinsei Bank is coming along and will talk about transformation and how you change a financial institution in a culture that is not really about change. We have a lot of good stuff coming up.