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China Opens Up Equity Market To More Foreign Investment
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China has said it will more than triple the total amount of foreign investment in Chinese securities, as the existing programme nears its limit. At the same time, Chinese Premier Wen Jiabao has called for bolder financial reforms, calling for the 'Big Four' banking monopoly to be 'smashed'.
Earlier this year, the Chinese state media reported that authorities were considering expanding the capacity of the qualified foreign institutional investor scheme (QFII), a key channel for foreign investment in Chinese capital markets that was first launched in 2003.
Under the new guidelines, total foreign investment will be expanded to $80 billion, an increase from the current $30 billion limit. Similarly, Beijing also increased the mainland investment quota using offshore yuan by $8 billion, to $11 billion.
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In a statement, the China Securities Regulatory Commission said:
The Qualified Foreign Institutional Investors programme enhances our experience of monitoring and regulating cross-board investment and capital flows. It is a positive experiment to further open up the market and achieve the yuan convertibility under the capital account.
At the same time, Chinese Premier Wen Jiabao told the Chinese National Radio that the national monopolies of state-owned banks need to be broken.
Calling for bolder financial reforms, Wen said:
Frankly, our banks make profits far too easily. Why? Because a small number of major banks occupy a monopoly position, meaning one can only go to them for loans and capital. That’s why right now, as we are dealing with the issue of getting private capital into the finance sector. Essentially, that means we have to smash their monopoly.
According to Reuters, breaking the monopoly powers of China’s ‘Big Four’ will also help tame the underground lending market, where annualised interest rates can be as high as 100 percent, a market that the Chinese central bank estimates is worth almost $385 billion.
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The move will allow financial institutions greater room for manoeuvre in China’s closed domestic equity markets, albeit one of the world’s worst performing markets last year. China’s markets are typically dominated by retail investors, compared with institutional investors in sophisticated markets, who often herd together for petty gains, contributing to high short term volatility.
Still, analysts say the twin policy shifts are a sign of Beijing relaxing its tight grip on capital flows and will no doubt boost the yuan’s role as an alternative to the dollar as a global reserve currency. This year, China has already concluded a series of bilateral currency swap deals and new currency pairs in its onshore trading markets.
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