Since China began opening up its capital markets in 1992, the country’s concerted approach to liberalization has gradually won the confidence of international investors.
The latest example of China’s commitment to financial reform is the awarding of a domestic fund custody license to Standard Chartered – the first foreign bank to be granted such a license. This is a significant development as it marks another step towards welcoming foreign investors to the world’s third-largest equity and bond markets, with a combined worth of nearly USD20 trillion.
With investor interest in China growing, Chinese authorities have launched measures to help smooth the process, with several more in the pipeline. The following are some of the latest milestones in the journey to a more open and equal market system in China.
Standard Chartered Acquires Fund Custody License
The China Securities Regulatory Commission (CSRC) granted a domestic fund custody license to Standard Chartered Bank, allowing it to directly access domestic funds and provide custodial services for investors in China.
Bond Connect Continues To Advance
To further enhance the appeal of Bond Connect, an access scheme launched in July 2017 to facilitate foreign investment in the China’s interbank bond market, Chinese regulators announced a series of enhancements, including real-time delivery-versus-payment and block trade allocations.
To attract more overseas institutional investors into China’s USD11 trillion bond market, a three-year tax holiday was introduced, exempting overseas investors from paying Withholding Tax and VAT on interest from their onshore bond investments between November 2018 and November 2021.
London-Shanghai Stock Connect
This access scheme, which will allow investors in China and abroad to trade depositary receipts of listed companies, will be a big boost to Chinese companies expanding their business abroad when it is launched later this year.
In addition to the above, we anticipate further efforts to streamline the application process for the various China access schemes. In the near future, we also expect the introduction of futures and options products, as well as new hedging tools, which should entice more overseas participation in China’s capital markets.
The Near-Term Challenges
The renminbi’s (RMB) recent depreciation could impact foreign investors’ appetite for RMB assets, while forcing domestic investors to hedge risk overseas. But investor confidence is expected to sustain if the currency holds its ground.
China’s debt, at 299 percent of GDP (up from 171 percent in 2008) is another obstacle to growth. Mindful of this, Beijing is reining in over-lending while working to encourage domestic consumption and reduce the economy’s dependence on exports. This can also shield growth from the worst effects of the trade war with the US.