When trading began in Frankfurt on Wednesday, securities denominated in the Chinese currency, the yuan, began changing hands there for the first time.
At 9 a.m. CET, the executive board members of China Europe International Exchange, or Ceinex, launched the new market place with a bell ringing on the trading floor of the Frankfurt Stock Exchange.
“Today’s start of market operation is a major milestone to establish the world’s first authorized renminbi [the official name for the yuan] market outside mainland China. We aim to steadily expand our product offering to further increase the attractiveness of Ceinex for international investors,” co-chief executive Han Chen said.
Deutsche Börse chief executive, Carsten Kengeter, Huang Hongyuan, the president of Shanghai Stock Exchange, and the Chinese ambassador to Germany, Shi Mingde, also attended the launch.
Ceinex is intended to become a gateway into the Chinese financial market. This gateway is also open to German private investors – at least a little.
The new exchange is the first trading platform outside China for securities denominated in yuan. The project was completed in record time, after the German and Chinese governments reached an agreement to establish the exchange last March. German Chancellor Angela Merkel and Chinese Premier Li Keqiang had made the project a priority.
“ We want to make China tradeable in Germany. But we have only begun our journey.”
The joint venture is backed by Deutsche Börse, the Shanghai Stock Exchange and the China Financial Futures Exchange. Deutsche Börse and the SSE each own 40 percent of the company.
The trio is pursuing ambitious goals. “We want to make China tradeable in Germany,” said Deutsche Börse manager Uwe Schweickert. “But we have only begun our journey.”
In fact, the range of securities being traded on the new exchange is still very small. It includes, for example, an index fund (ETF) on the SSE 50 market indicator, which includes the 50 largest Chinese companies listed on the Shanghai Stock Exchange. There is also an index fund on the Chinese money market. Bonds issued by Chinese banks and denominated in yuan are also expected to be available on the first day of trading.
According to Mr. Han, the new exchange primarily targets institutional investors, such as insurance and investment companies. But private investors can also order Ceinex products through their broker or the Xetra system. This should be unproblematic with the ETF on the SSE 50, for example, provided the investor chooses the version traded in euros.
However, investors can only buy securities denominated in yuan if their broker also supports the currency. But investing in yuan is a potential risky proposition, as the currency has fluctuated considerably in the past.
The stock market is another story altogether, as investors are increasingly worried about the Chinese economy. The economy is growing more slowly than expected, and many investors have suffered painful losses in recent months. Even the Beijing government’s intervention was initially unable to stop the sharp declines on Chinese exchanges.
Despite the turbulence in the Chinese financial market, Frankfurt has high hopes for the yuan business. The city hopes to become a hub for the Chinese currency, which could be added to the International Monetary Fund’s basket of currencies in a few days. “We are following the trend of yuan internationalization,” said Mr. Han.
The Ceinex expects to significantly expand its product portfolio. To this end, the new exchange has already brought the Frankfurt-based China Construction Bank on board. It is expected to issue new financial instruments denominated in yuan.
By next year, the Ceinex plans to offer so-called D-shares. The letter “D” stands for Deutschland, or Germany. The new share class will enable Chinese companies to raise fresh capital on the German market.
So-called H-shares, traded on the Hong Kong Stock Exchange, operate in similar fashion today. Those who wish to invest in China are almost always forced to go through foreign channels, because foreign investors have only been permitted to acquire Chinese stocks to an extremely limited extent until now. This is why most private investors currently invest through fund products.
If the Ceinex plans come to fruition, the exchange will provide investors with another point of access to the Chinese capital market. However, investor advocates warn against excessive euphoria.
Although the products listed on the Ceinex are subject to supervision by the German securities regulatory agency, those who invest in Chinese stocks are taking both financial and legal risks. Shareholders could run into difficulties, for example, when they seek to claim damages against Chinese companies, said Daniel Bauer of the German Association for the Protection of Capital Investors. “This will be essentially impossible.”
Michael Brächer covers the financial industry for Handelsblatt. To contact the author: firstname.lastname@example.org