- Interative Brokers and Saxo among firms laying groundwork
- QDII2 program to be rolled out at ‘appropriate time’: PBOC
Online brokerages from around the world are gearing up for what could be China’s biggest step yet to unleash the nation’s 109 million individual investors on global markets.
Interactive Brokers Group Inc., Saxo Capital Markets and Robinhood are among international firms that have set up or expanded their presence in Asia’s largest economy over the past 12 months. While Chinese citizens currently have limited scope to invest overseas because of the nation’s capital controls, the central bank has pledged to start a trial program for trading foreign securities at an “appropriate time.”
With Chinese policy makers focused on ending 16 straight months of capital outflows, now might seem an odd time for brokers to bet on the approval of a new route for citizens to move money overseas. But Saxo Capital is confident that the program, known as QDII2, will start by next year as outflows abate and authorities refocus on economic reforms. For the Copenhagen-based firm and its peers, it’s better to be early than miss out on a potentially huge group of new customers eager to try their hand at cross-border trading.
“We are actively looking for partnerships in China as we prepare for the QDII2 program,” Adam Reynolds, the Asia Pacific chief executive officer of Saxo Capital in Singapore, said in an interview. “Though the details of the program have not yet been defined, we believe it will create significant opportunities for us in China.”
Saxo Capital, which set up a 15-employee unit in Shanghai’s free trade zone in September, is seeking more deals with local financial firms after signing an agreement in May with Shanghai Lujiazui International Financial Asset Exchange Co., a peer-to-peer lender. The plan is to let local partners plug into Saxo Capital’s global trading system and share users, Reynolds said. He expects the number of Chinese traders on his firm’s platform to reach 200,000 in the first few months after QDII2 starts, from a “very limited” number now.
Interactive Brokers, one of the biggest electronic broker-dealers in the U.S., is looking to expand its seven-year-old office in Shanghai in anticipation of a pickup in business once QDII2 starts, according to David Friedland, the firm’s Asia Pacific managing director.
“We are well prepared and ready to go if the trial was announced now,” Friedland said by phone.
At Robinhood, the U.S. startup that offers free stock trades, Chinese investors can open an account to trade American stocks and exchange-traded funds through an app developed by Baidu Inc., one of China’s biggest Internet companies.
The partnership, which was announced last month, adds to offerings from Tiger Brokers, whose shareholders include Chinese smartphone maker Xiaomi Corp., and Hong Kong-based Futu Securities Ltd., which is backed by Tencent Holdings Ltd. 8 Securities Ltd., an online trading service in Hong Kong, has attracted Chinese investors after launching a zero-commission trading platform for Hong Kong and U.S. stocks.
Under China’s current rules, citizens can only move $50,000 out of the country each year. While they also have access to some overseas assets through China’s Qualified Domestic Institutional Investor program and can buy Hong Kong shares and funds, trading other overseas securities directly is difficult.
It’s unlikely that Chinese leaders will approve QDII2 anytime soon because they’re still worried about capital outflows, said Xia Le, chief economist for Asia at Banco Bilbao Vizcaya Argentaria SA in Hong Kong. Policy makers have capped the QDII quota at $89.99 billion since March 2015 after eight years of steady expansion, a sign they want to prevent individuals from shifting money out of the country.
“The policy tone at the moment is to limit outflows and encourage inflows,” Xia said. “The strongest outflow pressure comes from individual investors, so I don’t see QDII2 coming through in the short term.”
Optimists could take heart from an annual report released by the People’s Bank of China last month. The central bank listed QDII2 as a “key task” for increasing the convenience of investing in offshore financial markets, without providing details on the program’s specifics or a timeline for implementation.
With the yuan weakening and domestic shares mired in a slump, it’s easy to see why Chinese investors would want to broaden their investment options. The benchmark Shanghai Composite Index has dropped 14 percent this year, versus a 6.3 percent gain in the S&P 500 Index. China’s benchmark index was down 0.7 percent at the mid-day break on Friday.
“It’s definitely good to have a easy access to foreign markets, especially when domestic stocks are in a bear market,” said Tian Hongxia, 47, who works at a department store in Shanghai and has been trading local stocks since 1997.
The number of mainland China users at 8 Securities is expected to double if QDII2 is approved, said Charles D’Haussy, the firm’s vice president for sales and business development. The brokerage is planning to set up an office in China as soon as it secures regulatory approval.
“We are building up the sales and marketing team,” D’Haussy said. “We are very excited about the program.”
— With assistance by Gary Gao