China's Capital Markets -The changing landscape 3 Executive summary Chinas total stock market capitalisation has risen more than tenfold in the past six years to USD 4.2 trillion at the end of Q1 2011. While preparations for the long-awaited International Board are underway, the formal introduction of chiNext and of stock Index Futures has broadened the market for both domestic and overseas investors The equity market has been evolving and growing towards a more even mix of investor classes, with institutions such as investment funds pension funds, insurance companies, corporates, sovereign wealth funds and Qualified Foreign Institutional Investors(QFlls) playing a more pr nt role Despite their relatively small market share, QFlls important in China s equity market in terms of enhancing fundamental esearch and market sophistication. As the QFl pool keeps growing, the Iq nd to USD 30 billion before long The recent development of offshore renminbi business in Hong Kong marks the beginning of a new stage in the promotion and internationalisation of the Chinese currency in offshore markets. While Shanghai looks set to emerge as a global financial centre in its own right, the financial cooperation between Hong Kong and Shanghai will continue to strengthen through further cross-border investments and dual/ cross-listing of shares, ETFs and other securities in both markets Although China s corporate sector remains highly dependent on bank financing there is growing interest in corporate bonds. We expect this growth to continue, particularly if there is further tightening of the bank and regulatory environment While many financial products are in their infancy, the growth in the market for stock index futures shows the level of pent-up demand and how new products can emerge and soak up demand once approved and successfully launched Acknowledgements This report would not have been possible without the generous insights of FTSE Group (equities section) and Dagong Global Credit (bonds section) Contributors: Stuart Leckie and Yuri Zhou, Stirling Finance: Jessie Pak and FTSE Group, Jialin Chen, Dagong Global Credit, Chris arshall and Hong Chen, KPMG China Editor: Mike Hurle. KPMG China Design: Pui Lam Chan, KPMG China 0 2011 KPMG, a Hong Kong partnership and a member firm of the KPMG network of independent member firms affiated with KPMG Intemational Cooperatie ( KPMG International ), a Swiss entity. All rights reserved.Executive summary Acknowledgements This report would not have been possible without the generous insights of FTSE Group (equities section) and Dagong Global Credit (bonds section). Contributors: Stuart Leckie and Yuri Zhou, Stirling Finance; Jessie Pak and FTSE Group, Jialin Chen, Dagong Global Credit, Chris Marshall and Hong Chen, KPMG China. Editor: Mike Hurle, KPMG China Design: Pui Lam Chan, KPMG China China’s total stock market capitalisation has risen more than tenfold in the past six years to USD 4.2 trillion at the end of Q1 2011. While preparations for the long-awaited International Board are underway, the formal introduction of ChiNext and of Stock Index Futures has broadened the market for both domestic and overseas investors. The equity market has been evolving and growing towards a more even mix of investor classes, with institutions such as investment funds, pension funds, insurance companies, corporates, sovereign wealth funds and Qualified Foreign Institutional Investors (QFIIs) playing a more prominent role. Despite their relatively small market share, QFIIs are increasingly important in China’s equity market in terms of enhancing fundamental research and market sophistication. As the QFII pool keeps growing, the total quota is expected to expand to USD 30 billion before long. The recent development of offshore renminbi business in Hong Kong marks the beginning of a new stage in the promotion and internationalisation of the Chinese currency in offshore markets. While Shanghai looks set to emerge as a global financial centre in its own right, the financial cooperation between Hong Kong and Shanghai will continue to strengthen through further cross-border investments and dual / cross-listing of shares, ETFs and other securities in both markets. Although China’s corporate sector remains highly dependent on bank financing, there is growing interest in corporate bonds. We expect this growth to continue, particularly if there is further tightening of the bank and regulatory environment. While many financial products are in their infancy, the growth in the market for stock index futures shows the level of pent-up demand and how new products can emerge and soak up demand once approved and successfully launched. © 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 | 3