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China’s offshore financial hub – Industry roundup: 6 July

Hong Kong gets a boost with China's offshore financial hub, ETF Connect

Hong Kong recently expanded its cross-border investment channel with Shanghai and Shenzhen by introducing two new classes of financial products, cementing the city's position as mainland China's offshore capital hub, stated reports. According to China Asset Management, the ETF Connect enables global investors to access 83 exchange-traded funds (ETFs) in China (53 in Shanghai and 30 in Shenzhen) through Hong Kong accounts. Reports indicate that this expansion will potentially attract up to 200 billion yuan (US $29.8 billion) in investments within a year or two.

According to reports, Hong Kong serves as an important stepping stone for Chinese companies and investors to tap into overseas funds, as well as a gateway for global capital to enter China, the world's second-largest economy and capital market. Julia Leung Fung-yee, Deputy Chief Executive Officer, Securities and Futures Commission (SFC), commented that “Hong Kong is a place of convenience, where investors can invest knowing they are meeting the regulations of China without being physically on the mainland.”

An ETF is comprised of a collection of underlying securities, such as stocks, commodities and other asset classes, enabling investors to buy and sell on a stock exchange in the same way that they would a regular stock.

According to data from Shenwan Hongyuan Group and Huachuang Securities, 694 ETFs worth 1.5 trillion yuan trade in Shanghai and Shenzhen, with options increasing 30% year-on-year. In comparison, China's onshore market has reported a total market capitalisation of 84 trillion yuan. Huaxin Securities stated that Hong Kong's ETF market is much smaller, with only 150 such funds and HKD 405.9 billion (US $51.7 billion) in assets under management.

The Chinese and Hong Kong monetary authorities also announced that they will create a Swap Connect for international investors to insure against the risks associated with the 3.7 trillion yuan in offshore bonds they own. Additionally, the financial and monetary regulators of China and Hong Kong stated that they will allow users to exchange one stream of future interest payments for another. The swap is expected to launch by the end of 2022.

Hong Kong also reportedly received a boost as the largest offshore trading hub for the renminbi in the world. The Chinese central bank made its currency swap facility with Hong Kong permanent and increased its size by 60% to 800 billion yuan. Renminbi-denominated investments as well as China-related investments will continue to grow, according to Lu Weiming, President, Orient Securities Company Limited.

ECB to decarbonize its €344 billion corporate bond portfolio

The European Central Bank (ECB) intends to decarbonize its €344 billion corporate bond portfolio gradually in accordance with the 2015 Paris Agreement. Beginning in October 2022, the Eurosystem expects to direct its significant redemptions of cash maturing from corporate debt, estimated at €30 billion per year, to issuers with lower greenhouse gas emissions.

Isabel Schnabel, Executive Board Member and Head of Market Operations, ECB, stated that the bank's portfolio is currently biased toward high-emitting businesses because they are more likely to issue bonds. Schnabel added that those companies that are the least green today will have to do the majority of the transition, providing them with incentives to become greener and help them remain a part of the portfolios over time.

The ECB introduced measures aimed at mitigating climate-related financial risks on the Eurosystem's balance sheet, a year after Schnabel stated that the ECB is now required to consider climate change if its consequences threaten eurozone price stability. Climate change risks are expected to be included in the Eurosystem's assessments of corporate bonds used as collateral beginning this year. It will reportedly restrict the number of bonds issued by high-carbon-emitting non-financial corporations that can be used as collateral when borrowing from the Eurosystem. Furthermore, the Eurosystem has established minimum standards for incorporating climate risk into national banks' in-house credit assessments, which is expected to be implemented by the end of 2024.

According to the central bank, rating agencies' current disclosure standards are still unsatisfactory. The Eurosystem strongly encourages them to become clearer on including climate risks into their ratings. Commencing in 2026, the ECB is expected to require climate-related disclosure for collateral in Eurosystem credit operations, which will exclude companies and debtors that do not comply with the Corporate Sustainability Reporting Directive. The majority portion of the assets that can be used as collateral do not fall within this rule at the moment.

According to Katharine Neiss, Chief European Economist, PGIM Fixed Income, the positive effect will build up over time by aligning itself with governmental goals, setting a good example, and motivating businesses' investment plans to be in line with established climate targets.

BNY Mellon and Emirates NBD Group partner to accelerate capital market growth in UAE

BNY Mellon, US-based global investment financial institution, and Emirates NBD, Dubai’s government-owned bank and one of the largest banking groups in the MENAT (Middle East, North Africa, and Turkey in terms of assets) region, have partnered to accelerate the growth of the capital markets in the United Arab Emirates (UAE). The alliance reportedly combines BNY Mellon’s global footprint with Emirates NBD’s regional expertise to provide clients in the UAE and around the world with access to world-class capital markets infrastructure and technology.

Through collaboration, BNY Mellon and Emirates NBD expect to facilitate global investor access to the thriving market in the UAE through digitalization. The capital markets in the UAE are reportedly expanding, with numerous new listings and a notable increase in market liquidity on both the Dubai Financial Market and the Abu Dhabi Securities Exchange.

Ahmed Al Qassim, Group Head, Corporate and Institutional Banking, Emirates NBD, commented that international investors can now leverage UAE's upcoming IPOs, bolstering the investor base and liquidity on the local exchanges.

EU and US embedded finance more than doubled in 2021

According to a report by Stripe, a payments technology provider, and Finch Capital, VC investments in embedded finance more than doubled between 2020 and 2021 across Europe and North America. The report states that the European market is gaining traction in North America with over US $1 billion in VC investments into embedded finance in 2021, totalling $6.7 billion (excluding Klarna).

Finch's research examines the significance of the embedded finance trend in the financial services industry today. Embedded finance is said to represent the seamless integration of payments into online experiences with minimal friction, meeting the rising demands of digital users.

Stripe claims that it uses embedded finance to improve user experience and business development across industries such as travel and hospitality, retail and ecommerce, and healthcare. Reports indicate that these industries are investing a vast amount in embedded finance solutions in order to advance user experiences, increase valuations and generate profitability. Embedded finance will reportedly have the greatest impact in B2B2C and B2B2B business models, particularly in payroll API services, credit collection and embedded investing solutions.

Embedded finance supported by APIs is said to signal a period of rapid growth and encourages the creation of new digital businesses by advancing financial inclusion, offering "one-stop" shop solutions, pursuing untapped markets and enhancing customer satisfaction. Industry insiders are well aware of the potential effects embedded finance may have as more and more businesses integrate it into their offerings.

Millions of open banking payments enabled in the eCommerce landscape by Paytrail and Mastercard

A Paytrail and Mastercard partnership has now enabled more than one million open banking payments each month, led by Aiia, a Mastercard company and European open banking provider. Paytrail and Aiia have reportedly been working together to accelerate open banking-powered payments in the eCommerce checkout flow since 2019.

Paytrail, which is powered by Mastercard's open banking platform, enables eCommerce for over 20,000 merchants and online shoppers. They claim to provide more payment options and a more convenient online checkout experience. Open banking, unlike traditional payment methods, enables anyone with a bank account to initiate quick and secure digital payments to a retailer's account as soon as possible and, in some countries, almost immediately.

In comparison to other methods, this open banking solution is said to complete a payment transaction in minimal steps as the payment is initiated directly from the bank without the need to manually enter payment details or switch between applications or interfaces. Reports indicate that this collaboration enables merchants to provide a fully integrated solution in the checkout environment.

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