Foreign firms adapt to China’s further opening
This past week has seen two positive developments amid a generally gloomy China-US trade war atmosphere. One was a truce in the trade war, and the other was China’s announcement of a time frame for its financial sector opening-up. The latter will have a profound impact on China’s capital market and, based on the time frame in question, 2020 is set to be a year full of significant changes to its financial sector.
The China Securities Regulatory Commission (CSRC) on Friday announced definite dates to scrap foreign ownership limits in the domestic financial sector. Specifically, foreign investors will be allowed to take full control of mainland-based futures companies from January 1, fund management companies from April 1, and securities companies from December 1. The move marks an apparent acceleration of the financial sector’s opening-up from its previously announced 2021 target.
As the time frame was released when Chinese officials and US representatives were locked in a new round of trade negotiations in Washington, some have interpreted this latest development as a trade-war concession from Beijing. It is undeniable that China has been under certain pressure to open up its capital market to the outside world, but it would be short-sighted to consider an accelerated opening-up as a compromise.
The acceleration of the financial sector’s opening-up is a good thing for the Chinese capital market. Simply speaking, while the accelerated entry of foreign capital will contribute to the development
and prosperity of China’s financial market, foreign investors will now also be able to enjoy the dividends brought about by such development and prosperity.
After nearly three decades of development, China’s capital market has shifted toward a high-quality and steady-growth model as opposed to a highgrowth one.
But now it is time for the domestic market to face competition from mature overseas markets more directly. As such, intensifying the openingup of the financial sector is of great significance to China’s financial system.
The influx of global financial institutions will undoubtedly bring more
fierce competition to local financial institutions, but it will also incentivize progress. For starters, the continuous inflow of foreign capital will improve the investor structure in the domestic market. The entry of large sums of foreign funds will also be conducive to the construction and improvement of China’s capital market system.
China’s capital market is on a track of great development and prosperity, which has been a major cause of the mounting pressure to open up. Take the US market as an example. The prosperous development of the US capital market generated huge dividends for global investors. With the rise of China’s economic strength, the country’s capital market has the potential to achieve similar prosperity.
Based on such a belief, foreign financial institutions are calling for full access to the Chinese market so that they can share in the development dividends. Foreign capital has been flowing into China’s capital market at an increasing pace, with major global benchmarks like FTSE Russell, MSCI and S&P Dow Jones Indices widening their inclusion of A shares.
Meanwhile, relatively low valuations may be another reason behind the attractiveness of China’s capital market to foreign financial institutions. As the Dow Jones Industrial Average and the S&P 500 have almost quadrupled over the past decade, valuations may be peaking in the US.
By comparison, China’s stock market has been wavering at the bottom since the last bull market. Under these circumstances, an increasing amount of foreign capital has been buying into low-priced blue chips in the A-share market lately.
Nevertheless, it should be noted that while the Chinese market is luring foreign institutions on the hunt for profit, there is no guarantee that they would make money. Risks and challenges still exist in the market, especially considering that the local customer culture, market conditions, regulatory rules and institutional mechanism in China are different from those in the Western market.