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Wider capital markets access is key to China's global attractiveness

Insights2022-04-12

Chinasstoryofsuccessoverthelastfourdecadeshasbeencharacterizedbytimelydecisionsmadebythetopleadershiptowardagradualliberalizationofthedomesticfinancialmarkettha

China's story of success over the last four decades has been characterized by timely decisions made by the top leadership toward a gradual liberalization of the domestic financial market that has led to a more direct inclusion of Chinese assets into foreign investors' portfolios.

The recent removal of longstanding shareholding limits on foreign ownership of securities has contributed to attract foreign investments into China's financial system, leading to a domestic market that is gradually increasing in its degree of complexity and level of interconnectivity with global capital markets.

Last weekend, the third annual meeting of the China Association of Public Companies (CAPC), a national self-regulatory organization aimed at facilitating standardized regulation of the capital markets that operates under the supervision of the China Securities Regulatory Commission (CSRC), took place in Beijing.

The opening remarks by CSRC Chairman Yi Huiman attracted considerable media attention due to the renewed pledge to widen foreign investors' market access. In particular, the head of China's securities watchdog stressed that the promotion of a stronger collaboration between the mainland and Hong Kong capital markets, through the expansion of Stock Connect programs, and improvements in the linkage of Shanghai with London, arguably the world's greatest financial market, can be conducive to enhancing the competitiveness of China's domestic capital market.

The first consideration to be made is that a higher level of openness and accessibility to the domestic financial market is not only important but also desirable for China to do a rebalancing act with rival capital markets starting from the Asia Pacific region. In this sense, introducing relevant regulatory and structural conditions that incentivize foreign capitals to bet on the country's future development, China can be on track to bridge a gap that sees an underrepresented overseas investor base at less than 5 percent of its stock market capitalization while in Japan and South Korea foreign capital stands at around 30 percent.

Wider financial market access does not only mean an increased level of foreign capital inflow but also the acquisition of talented and skilled individuals. In this regard, the opening-up policies serve as a catalyst for attracting top global talents that are eager to explore new markets and geographies. The incoming flow of talents has a positive impact on the local economy since it adds diversity and breadth of experience and improves the level of market sophistication by introducing world-class best practices across the whole industry and increasing people-to-people cross-border connectivity.

The announced pledge for an even stronger connectivity through established schemes between prominent mainland financial centers, such as Shanghai and Shenzhen, with Hong Kong represents a rare opportunity for foreign investors to invest their money in a "single" China stock market. The move also sends out a clear signal that Hong Kong's role as a unique international financial center and gateway to China is not in question.

I strongly believe that the attempt from the CSRC to further boost the linkage of China's capital market with London, and most likely to launch similar schemes with Switzerland and Germany in the near future, is critical in this historical moment. The aim is to create the conditions for an ecosystem where financial resources can be easily channeled along the strategic trading route China-Europe, that consist of the world's second and third-largest economies, promoting a fair and reciprocal business relationship while propelling a sustainable growth rate for individuals and companies.

The creation via Connect schemes of a smooth transmission mechanism for different financial instruments, whether it is equity, debt or commodities, represents for China a fundamental condition to make its market a more competitive, stable and attractive place that fulfills its duty of efficient allocator of resources from those who have capital to those who need capital.

In addition, it cannot be denied that the announced wider market access is also conducive to China's strategy of promoting renminbi in international markets. A higher level of openness and participation in the domestic capital market has the dual purpose of increasing the circulation of China's currency in foreign investors' portfolios and creating a credible alternative to the U.S. dollar in terms of share of global trade transactions.

One last aspect to bear in mind is the intrinsic value of trust and reputation that pervades the whole financial services industry. Many people tend to forget that China did not suffer the same kind of profound, long-term reputational damage that happened to the U.S. and the EU because of the 2008 financial crisis. In this context, China should be regarded rock-solid trust from those foreign investors that are in search of a safe harbor amid current post pandemic market volatility.

At a time of ever-growing uncertainty and perceived fragmentation of markets, where globalization is rapidly evolving into economic regionalism, having a bold approach that promotes openness and integration is uncommon. In a world that seems to pursue deglobalization, China is going upstream showing that financial cooperation can still be the only way to promote markets stability and stimulate widespread economic growth.

(CGTN)

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