Introduction: As regulatory environments tighten and geopolitical tensions rise, public pension plans and private equity firms are re-evaluating their strategies regarding China- focused funds. US institutions with significant private fund investments in China are facing increasing difficulties in exiting their investments.48 Changing regulatory landscape: US pension plans, with over $4 billion allocated to China-focused private equity, are delaying redemptions as their investments and funds approach the end of their 10-year lifespans. The regulatory environment has shifted dramatically, particularly following the delisting of Didi from the New York Stock Exchange in 2022, which has dampened US initial public offerings (IPOs) of Chinese companies. The introduction of US legislation requiring ByteDance to divest its TikTok operations has further complicated exit strategies for US-backed private funds, raising fears of diminished valuations. Decline in investment activity: Historically, US private equity funds were active in China, investing heavily in its consumer and internet sectors. However, investment from US funds fell by 68% in 2022, with only five Chinese companies backed by US private equity going public in New York since early 2022, a stark decline from the 18 in 2021, alone. The combination of the Federal Reserve’s interest rate hikes and new regulatory requirements effectively stalled potential IPOs, leaving investors with limited exit options. Implications for investors: The inability to exit investments has serious implications for foreign pension plans and private equity firms. As funds approach liquidation timelines, concerns grow over the lack of liquidity and the potential need to extend investment durations. Investors are left with few choices, often resorting to rolling over their investments in the hope that the IPO market will eventually reopen. The performance of China-focused funds has also suffered, with benchmarks such as the Warburg Pincus China fund experiencing a significant drop in internal rates of return. The landscape for foreign private equity investments in China is increasingly fraught with challenges. Regulatory changes, geopolitical tensions and a stagnant IPO market have created a complex environment for investors. As they navigate these difficulties, many financial actors are left with little choice but to extend their investment horizons while hoping for a more favourable exit climate in the future. Introduction: Foreign exchange (FX) settlement risk captures the risk that one party delivers the currency it sold but does not receive the currency it bought, resulting in a loss of principal. In order to mitigate FX settlement risk on a global scale, the private sector established CLS in 2002 as a response to public-sector calls. Today, on average, more than $7.2 trillion in 18 of the most actively traded currencies flows through CLS each day. CLS mitigates FX settlement risk by synchronizing the settlement of payment instructions for the two currency legs of an FX trade. It does this by providing payment-versus-payment (PvP) functionality in which a party’s payment instruction in one currency is not settled unless the corresponding payment instruction in the counter currency is settled. PvP’s importance is widely recognized by public- and private-sector initiatives such as the BCBS, which recommends using PvP settlement where practical; the G20 Roadmap for enhancing cross- border payments, which inter alia aims to facilitate increased adoption of PvP; and the FX Global Code. Growth of emerging market currencies comes with growth of FX settlement risk: According to the 2022 BIS Triennial Survey, the FX market turnover has multiplied by a factor of five over the past decades, from around $1.5 trillion to approximately $7.5 trillion per day. Throughout its evolution, several key currencies have comprised the bulk of FX trading, dominated by the US dollar, which facilitated offshore funding markets and serves as a base currency through which other currencies are exchanged indirectly. The Chinese renminbi’s share of the FX market has grown from 1% 20 years ago to 7% today, making it the fifth most actively traded currency. Overall, the growth in EM currency trading creates opportunities, but also increases challenges regarding higher systemic risk exposure, less efficient capital allocation and higher settlement risks for market participants. The BIS Triennial Survey found that the non-PvP share in overall FX turnover is approximately 22%, largely attributed to EM currencies. Solutions are needed to further mitigate FX settlement risk: According to the BIS Triennial Survey, the average daily turnover of non-CLS-eligible currencies more than tripled from $0.2 trillion in 2010 to $0.7 trillion in 2022, while the share grew from 5.5% of trades to 8.5%. Adding new currencies to CLS’s settlement service is a complex endeavour, requiring ongoing support from central banks on both sides of the currency flow, and crucial legal, risk and liquidity standards must be met in the jurisdiction of onboarding. Beyond PvP , CLS is exploring the possibility that EM currencies can benefits further from CLSNet, an automated bilateral payment netting calculation service across 120 currencies.CASE STUDY 1 Geoeconomic tensions impede investment exit strategies CASE STUDY 2 Growth of emerging market currencies Navigating Global Financial System Fragmentation 24

Navigating Global Financial System Fragmentation 2025