Experts encourage greater openness of financial markets
With RMB-denominated financial assets more attractive than ever to global investors, experts believe China should continue to gradually open up its financial markets.
Most of the world’s economies are still crippled by the coronavirus pandemic, and commodity prices recently hit record highs.
Financial assets such as those denominated in RMB, which can provide stable returns, are sought after by investors around the world, but inflation has become a major factor in earnings dilution.
In April, holdings of RMB bonds of foreign institutions increased by 64.86 billion yuan ($ 10.16 billion) month on month.
These institutions favor Treasury bills issued by central authorities in China. In April, their holdings of these bonds increased by 51.74 billion yuan month-on-month, according to China Central Depository and Clearing Co.
Financial conditions continued to improve in the United States, the euro area and the United Kingdom, according to a study by Moody’s Investors Service, while these conditions in emerging markets returned to their historical average. Political support and progress in the deployment of COVID-19 vaccines has spurred these conditions.
In addition to the attractiveness of financial assets, foreign capital inflows into Chinese financial markets were triggered by the widening gap between the yields of Chinese treasury bills and those issued in the United States.
The Chinese currency has gained more than 10% against the US dollar over the past year, driven by the economic rebound from the pandemic and capital inflows from abroad. It recently hit highs last seen in May 2018, but this rapid appreciation is expected to be short-lived as market forces will cause the exchange rate to move back and forth.
According to experts, the increased participation of foreign capital in Chinese financial markets will not change in the short to medium term.
Zhong Hong, vice president of the Bank of China research institute, said foreign investors will continue to buy RMB-denominated assets this year, while there may still be uncertainties and fluctuations over the world market.
These investors are drawn to China’s strong economy and relatively stable interest and exchange rates, compared to those elsewhere in the world, Zhong said.
Fang Xinghai, vice chairman of the China Securities Regulatory Commission, said Chinese regulators will take measures to keep the capital market stable while the opening up continues and prevent large-scale fluctuations, which may be caused by cross-border capital flows.
He added that one option is to apply quotas to control daily trade to the south and north through the Shanghai, Shenzhen and Hong Kong inventory connection programs.
“If foreign capital inflows causing large fluctuations in the stock market, we can temporarily stop trading,” Fang said at a panel discussion at the Boao Forum for Asia in April.
“We also have measures to prevent the market from being affected by significant fluctuations, which may result from significant inflows and outflows of foreign capital,” he added.
At the end of March, foreign capital represented about 5% of the Chinese stock market, he said, adding that by comparison, the proportion of Chinese stocks in the world’s major indexes remains very low.
As more and more foreign capital flows into the domestic stock market, it plays a greater role in pricing stocks. The fact that this capital is mostly held by institutional investors means that it can contribute to market stability, Fang said.
He added that financial regulators are planning to further increase the proportion of Chinese stocks in major global markets and expand the scale of inclusion to attract more foreign capital.
Xuan Changneng, deputy head of the State Administration of Foreign Exchange, or SAFE, said moderate net inflows of cross-border investments in securities, mainly stocks and bonds, have been maintained so far this year, in accordance with to the generally stable situation on foreign trade.
John Waldron, chairman and chief operating officer of Goldman Sachs, said pilot projects offering increased free foreign currency convertibility were recently launched in Beijing and Shenzhen, in Guangdong province.
He said that these plans point the right direction for financial openness and that opening up capital services is good news for many foreign-invested enterprises entering China.
On May 6, as part of the latest initiative to facilitate the opening up of China’s financial sector, the People’s Bank of China (the central bank) released detailed new rules for the cross-border wealth management project in the region of China. the Grande Baie. The rules include quotas for GBA residents to make certain financial investments.
Wealth Management Connect is a pilot program to help residents of the GBA, which includes nine cities in Guangdong, as well as Hong Kong and Macao, to make cross-border investments in wealth management products, or WMPs, offered by banks. of the GBA.
Particularly noteworthy is the proposed overall quota of 150 billion yuan and a limit of 1 million yuan per person for WMP’s cross-border investments in the GBA.
Sonny Hsu, vice president and senior credit manager at Moody’s Investors Service, said the proposed rules are good news for the asset management units of banks in mainland China, Hong Kong and Macau. .
“However, the potential income of banks from the program will be limited, as investments to the north and south are initially capped at 150 billion yuan,” Hsu added.
Analysts said the Connect program, if implemented, would mark another step towards convertibility of the renminbi into the capital account.
A pilot zone has also been established in the southern province of Hainan. On April 9, SAFE and other financial regulatory departments jointly released a set of new policies aimed at further stimulating the opening of the financial sector at the Hainan Free Trade Port.
These rules allow certain institutional investors to freely send funds, inward and outward, by adopting the required methods, and to make investments within the framework of designated quotas. At the same time, currency registration procedures have been simplified.
Joe Yizhou He, chief executive of Australian Capital Equity, has witnessed China’s accelerated financial openness since regulators announced a series of policies in 2018.
These measures included the lifting of the foreign ownership cap for banks and asset management companies, the equal treatment of domestic and foreign capital and the simultaneous authorization of certain financial institutions to establish branches and subsidiaries.
“To date, the implementation of the policy has been effective,” said He, who is working on establishing a renminbi investment entity at the Hainan Free Trade Port through the corporation program. in qualified foreign limited partnership.
“Hainan’s special policies can facilitate foreign investment in China, as the application process and market access requirements have been simplified, and a greater level of flexibility is offered compared to other regions of China,” he said. he declared.
China’s capital markets, in particular, have seen deeper reform and greater openness.
“With the Chinese stock markets becoming more welcoming to the light-asset new economy sector, I have seen more and more entrepreneurs in this sector choose the A-share market as their IPO destination ( initial public offering), ”he said.
Although foreign capital was introduced to the A-share market almost two decades ago, there has been an acceleration in recent years following the launch of the Shanghai-Shenzhen-Hong Kong Stock Connect program. The acceleration was reinforced when the MSCI indices, which measure stock market performance in a particular area, incorporated Chinese equities in 2018.
In the private equity market, many foreign investors, wait-and-see, are expected to make more direct investments denominated in RMB due to the arrival of policies of greater opening of the financial market.
“In my experience, the exchange rate policies so far support the free conversion of a certain amount of profit that we have earned in China, and there is basically no obstacle to doing so,” he said. -he declares.
As China quickly brought the pandemic under control, foreign investors have shown increased confidence and optimism in the country’s markets.
In addition to secondary stock and bond markets, they are paying more attention to equity investments, especially in innovative and high-tech companies, according to experts.
Australian Capital Equity seeks investment opportunities in advanced areas such as the digital economy, new lifestyles and technological innovation.
On April 20, President Xi Jinping said in a keynote address via video link at the opening ceremony of the annual Boao Forum for Asia conference that China will continue to develop the free trade port of Hainan and new systems for a higher level open economy.
“China will actively participate in multilateral trade and investment cooperation, fully implement the Foreign Investment Law and its related rules and regulations, further reduce the negative list of foreign investment, continue to develop the port of Hainan Free Trade and will develop new systems. for a better open economy, ”he said.
“All are invited to share the vast opportunities of the Chinese market,” said the president.
Waldron, of Goldman Sachs, said that if China continues to improve financial sector laws and regulations in line with international standards and ensures unrestricted access to foreign investment, the country can expect to attract more investors and international institutions.
The measures taken will further boost the confidence of global investors in the Chinese market, he said.