Abstract: What are the process, pace, and future of China's financial market opening-up? At Boao Annual Conference 2022, Fang Xinghai, Lu Lei, along with other experts and government officials, joined a discussion on “China’s Financial Market Opening-up”.
FANG XINGHAI: PLENTY OF SPACE FOR FOREIGN CAPITAL'S SHARE IN THE SECURITIES MARKET
In the capital market, there are primarily two ways to "bring in money": 1) bringing in foreign capital to the domestic stock, futures, and bond markets, and 2) bringing in leading foreign financial institutions to provide services in the domestic market, particularly brokerage businesses, and futures companies.
Whether it would work or not depends on China’s economic performance and opening-up policy.
Progress has been made in attracting foreign institutional investors in recent years, with a total of 887.4 billion yuan of foreign investment flowing into the stock market in 2019-2021, though accounting for only 4.5% of the market cap of A-shares outstanding. In South Korea and Japan, however, foreign investment accounts for 20%-30% of the stock market cap. There is plenty of space for foreign investment’s share in China’s market.
I'm optimistic about the net inflow of foreign funds. Today's stock index is down, but net inflows to the Shanghai and Beijing Stock Exchanges are positive, suggesting international investors' confidence.
In terms of introducing prominent foreign institutions, the CSRC eased restrictions on the shareholding ratio one year early than planned. Twelve securities, fund, and futures companies have now been granted licenses to hold 100% of shares or a controlling stake in China, with 10 already opened and two more on the way.
I believe that as more foreign capital, particularly long-term institutional investors, enters the market and as more prominent international institutions provide services, the market's pricing, investment, and other capacities will improve. I expect to see more resilience and dynamism in the market.
LU LEI: HUGE POTENTIAL FOR FOREIGN HOLDINGS OF CHINESE ASSETS
Opening-up of capital accounts has always been under the spotlight.
The cumulative FDI stock was US$3.6 trillion by the end of 2021, and ODI stock was $2.6 trillion, up $1.6 trillion and $1.5 trillion respectively over the past 11 years (2010-2021). This is an important source of capital formation for China's economic development.
Any step towards opening-up takes a risk. That’s why we need a nice balance of growth, opening-up, and security. Improvements in management capacities and risk controls will instill confidence in opening-up and help to prevent negative shocks associated with it.
The pace of opening-up is determined by the demand of the real economy. Expanding the cross-border securities market channel necessitates the evaluation of fund efficiency and its contribution to the real economy.
Security issue deserves special attention with the complicated external environment. For the next step, we should improve ODI to support the Belt and Road Initiative and regulate the management of QFLP and QDLP in the meantime.
In the area of securities investment, domestic wealth management and insurance are moving towards internationalization, and the procedures have been further facilitated.
But we should be prudent with cross-border transactions involving complex financial derivatives.
Although global financial markets have been volatile recently, China's cross-border capital flows have remained stable, and changes in cross-border portfolio investment have remained within normal and controllable boundaries. For three reasons, I believe the development trend will continue:
1. China's consumption capacity and capital formation have laid a strong basis for the national economy's resilience following years of reform and opening up. There is good value as to allocation in both the securities market and forex market.
2. Over the last few years, RMB assets have had an independent global return performance that is beneficial to risk diversification by overseas investors.
3. In China’s stock market and bond market, foreign capital accounts for 3% and 4.5% respectively. There is still a large potential for global capital to increase its allocation to the Chinese capital market.
