Financial Market

Major decisions help China widen financial markets’ global access

A view of the Lujiazui Financial and Trade Zone in east China’s Shanghai. /CFP

A view of the Lujiazui Financial and Trade Zone in east China’s Shanghai. /CFP

Editor’s note: Matteo Giovannini is a finance professional at the Industrial and Commercial Bank of China in Beijing and a member of the China Task Force at the Italian Ministry of Economic Development. The article reflects the author’s views and not necessarily those of CGTN.

The central role financial markets play in the development of a country’s economy is sometimes underestimated compared to other growth factors.

China is one of the countries that has acknowledged how introducing structural market reforms and liberalization policies benefit the domestic economy and considerably increases its attractiveness to foreign investors.

Two important announcements have recently hit the headlines and received attention from the global financial community and China watchers.

On May 27, the central bank, the People’s Bank of China, announced that foreign institutional investors, including central banks, sovereign funds, commercial banks and pension funds, will be allowed access to bonds traded on the exchange market. Previously, foreign institutional investors could only trade bonds in China’s interbank market.

On the same day, the China Securities Regulatory Commission announced that exchange-traded funds (ETFs) would be included in the Chinese mainland’s stock connect scheme with Hong Kong. The decision will become effective in about two months.

Numbers often help to put statements into perspective and give a clearer picture of the impact of government policy decisions. China’s bond market is the world’s second-largest. By April, it was valued at nearly 140 trillion yuan ($21 trillion). Over 1,000 overseas institutional investors have invested in it, holding nearly 4 trillion yuan ($600 billion) in bonds, an increase of 225 percent in the last five years.

Therefore, the decision to extend access to the whole spectrum of domestic fixed income represents an important move to incentivize foreign institutional investors to increase their still limited exposure to a bond market characterized by returns with low correlation to other asset classes.

An electronic screen displays a chart in Hong Kong, south China, March 15, 2022. /CFP

An electronic screen displays a chart in Hong Kong, south China, March 15, 2022. /CFP

In particular, new directives that grant a higher level of discretion in foreign institutional investors’ choice of exchanges and the selection of settlement organizations or custody banks are critical factors that could drive large inflows of funds into China due to an improved investment environment for overseas investors.

At the same time, by facilitating access to its domestic bond market, China has laid the foundation for an overall upgrade in market and liquidity stability. A larger diversified institutional investor base can provide long-term financing, a high level of financial market sophistication and lower the risk of market volatility.

Having observed the evolution of China’s financial market with my boots on the ground for almost a decade, I have come to the conclusion that timing is an important element in the Chinese authorities’ decision-making process.

This is the case of the inclusion of ETFs in the stock connect scheme since the decision comes ahead of July 1, the anniversary celebrating 25 years of Hong Kong’s return to China.

I believe that the implementation of mutual access of ETFs not only represents a clear signal of the nonstop integration of the mainland and Hong Kong capital markets but also informs the global financial community about the level of confidence and commitment that China’s leadership maintains toward Hong Kong for its crucial role as a global financial hub and bridge between onshore and offshore markets and as a proactive participant in the Greater Bay Area.

One last aspect that deserves consideration is that an ETF cross-border trading scheme will allow foreign investors access to domestic giants such as Tencent and exposure to less celebrated players in the tech sector. That is because, according to the current rules, most of the listed tech companies are not eligible to be traded on the stock connect but could become accessible to investors via the ETF. The opportunity to be exposed to a wider range of financing avenues could positively impact the overall Chinese tech industry, characterized by a myriad of companies with high intrinsic value but often undercapitalized for their strategic goals.

In the end, the latest decisions by the central bank and the securities watchdog will pave the way for a better outlook on China for global asset managers and investors due to the increased accessibility to the domestic market. It will result in more cross-border investment opportunities and continued sustainable growth.

(If you want to contribute and have specific expertise, please contact us at Follow @thouse_opinions on Twitter to discover the latest commentaries in the CGTN Opinion Section.)

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