Chinas Capital Markets-The changing landscape |7 Many important a Share companies are also listed on the Hong Kong Stock Exchange(HKEx), as H Shares. Besides H-Shares, other China-related companies listed in Hong Kong include Red Chips, companies incorporated in Hong Kong which have at least 30 percent of their equity held directly or indirectly by mainland Chinese entities, and at least 50 percent of their sales revenue or operating assets derived from mainland China. H Shares traditionally traded at a discount to their a Share counterparts, but since 2007 there has been a dramatic narrowing premium due to the relative underperformance of a shares The changing investor landscape China' s equity markets are evolving towards a more even mix of investor classes. In some respects, institutional investors have now taken over from retail investors as the major force driving equity markets. The role of both domestic and foreign institutions is growing, as investment funds, pension funds, insurance companies, corporates, sovereign wealth funds(SWFs)and QFlls all look to increase their allocations to Chinese equities Nevertheless, retail investors continue to represent a sizable portion of the market. KPMG comment Total household savings in China hit RMB 31 trillion at the end of 2010, much of which has shifted between savings and stocks plus mutual funds. At the end of The number of investment funds 2010, institutions held total savings of RMB 25 trillion. They conduct around 40 China has grown substantially, percent of the trading by volume and own about 60 percent of Chinas tradable with many managers partly shares by value. As retail investors tend to follow the investment trends of owned by international firms institutional investors, any significant movement by institutional investors still has We see this as a positive the potential to trigger volatility in the market indication of the maturing of At the beginning of 2011, 60 fund houses were managing a total of 707 mutual expect the growth of investment funds authorised by the China Securities Regulatory Commission(CSRC), with total funds to continue in the coming ssets hitting RMB 2. 4 trillion for open-ended funds and RMB 1.4 trillion for close- decade ended funds. Equity funds and balanced funds accounted for 55 percent and 20 ercent of the open-ended fund universe respectively, with bond funds and fund-of- funds taking much of the remaining 25 percent In addition to retail fund business, segregated account business mandated by high-end individuals and corporations with special investment requirements have become more prevalent since 2007. The total fund size for segregated accounts reached RMB 60 billion in December 2010, and the 10 best performing accounts managed to reward their investors with a return of 24 percent for the year. 4 Insurance companies have also built up assets at a fast pace, reaching RMB 4.9 trillion at the end of 2010. Up to 20 percent of these assets can be invested in equities and equity funds. In general, insurers have been quite active and, given the nature of their business, inclined towards long-term, stable investment The total assets of China s supplemental pensions (enterprise annuities)also ncreased to RMB 300 billion at the end of 2010, and under current regulations up to 30 percent of this amount can be invested in equities Private equity(PE) funds have also taken strong equity positions in China, perhaps partly because of the difficulties they face in obtaining controlling stakes in target companies. At the end of 2010, the number of active Pe funds exceeded 600 with otal assets of RMB 10 billion under the management of 300 managers. Statistics show over two-thirds of those funds however have at least half of their assets llocated into the stock market and some 10 percent of the funds held more than 90 percent of their assets in stocks. The existing 286 PE funds yielded an average eturn of 10.6 percent in 2010. 7 released by CIRC China insurance Regulatory Commission). 8 Data released by MoHRSS (Ministry of 0 2011 KPMG, a Hong Kong partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG international"), a Swiss entity. All rights reserved.Many important A Share companies are also listed on the Hong Kong Stock Exchange (HKEx), as H Shares. Besides H-Shares, other China-related companies listed in Hong Kong include Red Chips, companies incorporated in Hong Kong, which have at least 30 percent of their equity held directly or indirectly by mainland Chinese entities, and at least 50 percent of their sales revenue or operating assets derived from mainland China. H Shares traditionally traded at a discount to their A Share counterparts, but since 2007 there has been a dramatic narrowing in the A-H premium due to the relative underperformance of A Shares. The changing investor landscape China’s equity markets are evolving towards a more even mix of investor classes. In some respects, institutional investors have now taken over from retail investors as the major force driving equity markets. The role of both domestic and foreign institutions is growing, as investment funds, pension funds, insurance companies, corporates, sovereign wealth funds (SWFs) and QFIIs all look to increase their allocations to Chinese equities. Nevertheless, retail investors continue to represent a sizable portion of the market. Total household savings in China hit RMB 31 trillion at the end of 2010, much of which has shifted between savings and stocks plus mutual funds. At the end of 2010, institutions held total savings of RMB 25 trillion. They conduct around 40 percent of the trading by volume and own about 60 percent of China’s tradable shares by value.2 As retail investors tend to follow the investment trends of institutional investors, any significant movement by institutional investors still has the potential to trigger volatility in the market. At the beginning of 2011, 60 fund houses were managing a total of 707 mutual funds authorised by the China Securities Regulatory Commission (CSRC), with total assets hitting RMB 2.4 trillion for open-ended funds and RMB 1.4 trillion for close￾ended funds.3 Equity funds and balanced funds accounted for 55 percent and 20 percent of the open-ended fund universe respectively, with bond funds and fund-of￾funds taking much of the remaining 25 percent. In addition to retail fund business, segregated account business mandated by high-end individuals and corporations with special investment requirements have become more prevalent since 2007. The total fund size for segregated accounts reached RMB 60 billion in December 2010, and the 10 best performing accounts managed to reward their investors with a return of 24 percent for the year.4 Insurance companies have also built up assets at a fast pace, reaching RMB 4.9 trillion at the end of 2010.5 Up to 20 percent of these assets can be invested in equities and equity funds. In general, insurers have been quite active and, given the nature of their business, inclined towards long-term, stable investment opportunities. The total assets of China’s supplemental pensions (enterprise annuities) also increased to RMB 300 billion at the end of 2010,6 and under current regulations up to 30 percent of this amount can be invested in equities. Private equity (PE) funds have also taken strong equity positions in China, perhaps partly because of the difficulties they face in obtaining controlling stakes in target companies. At the end of 2010, the number of active PE funds exceeded 600 with total assets of RMB 10 billion under the management of 300 managers. Statistics show over two-thirds of those funds, however, have at least half of their assets allocated into the stock market and some 10 percent of the funds held more than 90 percent of their assets in stocks. The existing 286 PE funds yielded an average return of 10.6 percent in 2010.7 2 China Securities Depository and Clearing Corporation Limited. 3 Wind, CMS China Research Department. 4 www.simuwang.com 5 Data released by CIRC (China Insurance Regulatory Commission). 6 Data released by MoHRSS (Ministry of Human Resources and Social Security). 7 Data released by PE Fund Data Center, CBN Research. KPMG comment The number of investment funds in China has grown substantially, with many managers partly owned by international firms. We see this as a positive indication of the maturing of China’s capital markets and expect the growth of investment funds to continue in the coming decade. © 2011 KPMG, a Hong Kong partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. © 2011 KPMG, a Hong Kong partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. China’s Capital Markets - The changing landscape | 7