Proactive Opening Up

2020-05-21 10:04:55 《Beijing Review》 2020年21期

By Zhang Shasha

The Peoples Bank of China (PBC), Chinas central bank, and the State Administration of Foreign Exchange(SAFE) issued new rules on May 7 to scrap quotas on the dollar-denominated qualifi ed foreign institutional investor (QFII) scheme and its yuan-denominated sibling RQFII, and further streamline procedures in order to facilitate their participation in Chinas financial market and boost the long-term development of the domestic capital market. The new regulations will take effect on June 6.

“Its a positive signal put forth by China to its unswerving effort to open up its fi nancial market, which is a proactive opening up devoid of any external pressure, and serves as an ideal opportunity for foreign investors to enter the Chinese market,”Zong Liang, chief economist of the Bank of China (BOC), told Beijing Review.

The novel coronavirus disease(COVID-19) pandemic has caused global market fl uctuations including uncertainties in the price of crude oil and various currencies, which have increased risks for global investors. “Chinas move at this time is of special signifi cance,” Zong said, adding that it showed a positive outlook for the market.

Moreover, while the global policy and market rates remain low at this stage, with some economies lowering their rates to zero or less, it is a good opportunity to invest in the Chinese market, which registered a relatively higher rate of return, he said.

A step forward

The new regulations highlighted the removal of restrictions on the investment quota of QFII and RQFII. The two major inbound investment schemes, introduced in 2002 and 2011 respectively, were seen as the most significant policies during Chinas opening up of its domestic capital market. According to SAFE, as of April 30, the total investment of 295 QFIIs was $114.7 billion, while that of 227 RQFIIs was $713.1 billion. The QFII quota has been expanded from $4 billion to $300 billion since its inception.

“With the removal of investment caps, the Chinese capital market will provide bigger and wider room for attracting international capital, which is of great importance for overseas capital to enter the domestic market,” Dong Dengxin, Director of the Finance and Securities Institute, Wuhan University of Science and Technology, told National Business Daily. “While the U.S. stock market has plummeted this year, Chinas A-share market has, to some extent, played a role in maintaining global market confi dence and has absorbed a considerable amount of international capital that has fl ed the U.S. market.”

International investors have demonstrated their interest in Chinas capital market since the inclusion of Chinese stocks and bonds in many major global indices such as MSCI, FTSE Russell, S&P Dow Jones and the Bloomberg Barclays Indices.

Zong also emphasized that the integrated management of the Chinese currency and foreign currencies in the new regulations facilitates foreign investors participation in the Chinese capital market. In addition, the new rules will provide more convenience for foreign investors to remit their funds after earning money from the Chinese market, which is conducive to dispel their concerns, he said.

While the Chinese economy has been gradually returning to normalcy, the capital market is at a relatively low point due to the impact of the pandemic, Zong said, which is an opportunity for investors to maximize their benefi ts and enjoy the fruits of Chinas continued development. Moreover, he stressed that the country is committed to building a healthy capital market, taking into account investors rights and benefi ts, which will minimize their investment risks.

Wang Youxin, a researcher with the BOC Research Institute, told Securities Daily that the new regulations will clear the institutional barriers for overseas capital and improve foreign investors convenience for holding renminbi assets, thus generating more enthusiasm.

In the short run, it is a shot in the arm for the market, while in the long run, renminbi assets will become an investment focus for global capital with the increase of overseas capital, Wang said.

A dynamic market

In recent years, as Chinas financial market has opened its door wider, foreign capital has continued to pour into the A-share market. The total value of foreign investors assets position in the A-share market was 1.6 trillion yuan ($225.7 billion).

Foreign shareholdings account for a large part of some corporate assets. For instance, as of April 30, those who had invested through QFII, RQFII and the Shenzhen-Hong Kong Stock Connect in the Midea Group, a Chinese electrical appliance manufacturer, made up 26.74 percent of the total.

However, foreign shareholdings accounted for only 3.3 percent of the A-share market in the fi rst quarter of 2020, which fell behind countries such as Japan and the Republic of Korea, whose foreign investment accounted for 15-30 percent of their total, according to the research institute of Guosheng Securities. This indicates that there is a lot of room for foreign investment in the future, Zong said.

As new regulations keep rolling out to facilitate foreign investors participation, the Chinese capital market will see continuous improvement. PBC Governor Yi Gang said in a recent article that China needs to accelerate financial opening up since it can encourage direct financing through bond and stock markets, while reducing reliance on bond lending. It can also help optimize the capital market structure and spur efforts to improve fi nancing effi ciency and curb the debt burden.

Li Jianjun, chief researcher with Zhong Shang Zhi Ku, a Chinese think tank, said that it is a critical stage to vigorously develop the capital market and expand corporate fi nancing channels. Financial opening up will give international investors access to participate in building the Chinese capital market, which is conducive to enhancing value investment and promoting rules and system building of the capital market.

He added that the new regulations will further expand the fi nancial market, optimize the capital market investor structure and enhance Chinas financial services capacity. It will promote the adjustment of the fi nancing structure and guide capital to industries with better prospects and operational capacity so as to enhance the capital markets support of science and entrepreneurial businesses, exerting the resource allocation capacity of the capital market.