The paper called for more coordinated efforts from industry participants and encouraged institutions to prepare for the long-term operational implications of China’s continuing project for integration with global markets.
Challenges highlighted in the paper included issues around currency, the complex local infrastructure in China, an existing ‘patchwork’ of systems, translation issues, and the developing regulatory landscape.
The Chinese regulatory market is both complex and constantly changing. This means firms tend to have to adapt to new requirements quickly, which can lead to issues in translating them into concrete processes, and therefore a need for significant documentation and record-keeping.
According to the report, China’s unusual ‘microstructure’ means shares acquired through the Shanghai-Hong Kong Stock Connect are not interchangeable with those acquired from the Qualified Foreign Institutional Investor (QFII) and Renminbi QFII schemes. There are also significant differences between the international and domestic trade processes.
These complexities mean firms have to have specific middle- and back-office systems to cope with the local market, and the complicated operational structure means more processes have to be completed manually.
The report also noted that, without any standardisation, various different channels have been designed to facilitate international transactions, and institutions have to evaluate which best meets their needs. They must then be prepared to evolve from their chosen path if another emerges as being more suitable in the future.
There are also practical challenges around language and currency descriptors. Domestic processes generally rely on use of specific Chinese characters, scripts and terminology, none of which are easily translated into English.
This could make screening payments to comply with know-your-client and anti-money laundering compliance more difficult, and it also means firms are likely, again, to find themselves relying on manual processes.
Equally, there are additional complexities caused by differing currency codes, the report said, with CNH used for onshore trading and CNY used for offshore. As firms will have to use CNH in the front office and CNY in the back office, a failure to translate them effectively could lead to issues with accounting, valuation and compliance.
The report suggested that a lack of standardisation in the approach to investing in China means different practices are being employed across global and Chinese markets.
It said: “There is a clear need for more coordinated efforts among market participants at an industry level, and active engagement and coordination with regulatory authorities to resolve them.”
Operational and process differences make settling trades in Chinese securities more complex than when investing in other markets. The report said: “Now [China] looks to integrate with foreign markets, there are differences between established domestic practices and internationally accepted standards and frameworks, which can be operationally difficult to reconcile.”
The report called these issues “speedbumps”, and suggested they “should not derail the overall process”.
It noted, however, that international institutions generally like to use systems and processes that they already use globally. Many of these are not compatible with “local nuances and specificities” of the Chinese market.
“Automation in the mid-back office can improve efficiencies and reduce costs. But disparities between domestic and international practices and frequent changes in the policy environment make it difficult and risky to undertake major operational changes at a firm level,” it said.
“Establishing industry-wide standards and frameworks to strike a balance between global and local practices will be crucial in solving the operational challenges for capital market firms. There is a clear need for more concerted efforts among industry participants, and active engagement and coordination with regulatory authorities on current issues as well as future direction of changes.”
“Resolving dual currency issues, language challenges, and trade lifecycle management disparities and other such measures would require everyone in the capital market ecosystem to work together as China advances to realise its aspirations of becoming a key global financial centre.”