Initially, China’s capital markets emerged in response to the incorporation process of Chinese enterprises. Since then, a series of major reforms were implemented to facilitate further development of the capital markets.
The first chapter of the recent liberalisation has focused on opening the door to foreign investors through various access schemes such as Qualified Foreign Institutional Investor (QFII), Renminbi QFII (RQFII), Qualified Domestic Institutional Investor (QDII) and China Interbank Bond Market (CIBM) Direct scheme, China-Hong Kong Stock Connect and Bond Connect.
Government Bond–Emerging Market Indexes (GBI-EM), have included China stocks or bonds in their benchmark indices since 2018. Meanwhile, the China regulators have been improving the market infrastructures, as well as operational efficiency. Some recent enhancements include the launch of the Prime Brokerage Business in the China Interbank foreign exchange market, allowing foreign investors to choose a longer settlement cycle, allowing more flexibility in the handling of failed trades.
Thanks to the inclusion in global indices, continuous growth of the GDP in the last forty years up to the end of 2019, and, relatively low correlation to other markets, China has been one of the favourite investment destinations for global investors. Today, China has emerged as one of the largest economies globally with the world’s second largest stock market, as well as second largest bond market.
While the COVID-19 outbreak adds to the uncertainty of global markets, investors are showing increased interest in China. A low-interest-rate environment around the world makes China's bonds market even more attractive to global investors.
As of the end of the first quarter of 2020, foreign investors held a total of CNY6.4 trillion in onshore China assets, including CNY1.9 trillion of equities, CNY2.3 trillion of bonds, CNY0.9 trillion of loans and CNY1.3 trillion of deposits. Despite the global market sell-off, foreign appetite in China bonds and equities rebounded strongly in April with the China-Hong Kong Stock Connect net inflows turning positive to CNY53 billion in April 2020 from outflows of CNY68 billion in March 2020. In terms of bond holdings, the total amount of Renminbi (RMB) bonds owned by foreign investors under the China Central Depository & Clearing Co (CCDC) posted 17 straight months of increase, reaching 30.45 per cent at the end of April 2020 from a year earlier to more than 2 trillion.
Continued opening-up policies are expected to drive further interest in the China market. The China Securities Regulatory Commission announced that it will be removing the foreign ownership limit in securities companies, effective from 1 April 2020, inspiring many foreign companies to set up wholly-owned subsidiaries in China. This move comes eight months earlier than the original timeline and is a strong indication of China’s regulator’s determination to reform its market despite the COVID-19 challenge the global markets are facing.
Another long-waited announcement is the implementation of the revised QFII and RQFII rules. Effective 6 June 2020, overseas institutional investors will no longer need to apply for investment quota. They will be able to choose the currency and timing of injection, enjoy more streamlined repatriation process through providing a tax commitment letter instead of special audit report and tax filing documents for profit repatriation. In addition, overseas institutional investors will be able to appoint multiple custodians (without cap). Some market analysts believe the relaxed QFII and RQFII rules will attract more capital inflows and help offset the economic downside risks from COVID-19. This may also help reduce market fluctuations due to short-term speculation because foreign institutional investors tend to have a long-term investment style.
Global economic slowdown and renewed US-China tensions may cast a shadow on China’s outlook. Standard Chartered Global Research expects1 China to resume positive growth from the second quarter of 2020, led by policy stimulus and the normalisation of economic activity since mid-February. While approximately 17 per cent of China’s economy is driven by external demand, the escalating recession risk in the rest of the world is likely to weigh on its recovery. The recent US proposal to block the Thrift Savings Plan, a government retirement fund, from investing in China assets has raised concerns on the impact on China’s market. It is expected that if this risk materialises, capital outflows from China would be limited, given that US pension funds’ current allocations to China bonds and equities are relatively small, according to the analysis of Standard Chartered Global Research2. As at end-2019, US pension funds’ assets were USD32.3 trillion with modest allocations to China equities or bonds, which is approximately 0.6% of asset under management (AUM).
To further increase foreign participation in China’s capital market, more work needs to be done to bring China even more aligned with international standards. For example, reform on Shenzhen Stock Exchange’s ChiNext Board or the adoption of DVP settlement mechanism for equities settlement to minimise counterparty exposure. FTSE Russell has deemed the delivery versus payment (DVP) settlement as one of their key considerations when reviewing whether or not to further increase the weighting of China A shares in its index.3
1 Global Focus – Economic Outlook Q2-2020 ‘Darkest before the dawn’ 2 Global Research – Local Market Alert – Assessing US pension allocations to China assets 3 ASIFMA - China’s capital markets – the pace of change accelerates
With the strong fundamentals and enormous opportunity, China continues gaining traction despite the volatility in global financial markets during COVID-19. China financial markets have been operating as usual after the extended Chinese Lunar New Year Holiday which ended on 2 February 2020. While global markets suffered 20 - 30 per cent declines in the first quarter of 2020, China CSI 300 was down by just 9.63 per cent during the same period and the World Bank anticipates China will still record positive economic growth of about 1% in 2020.4 As markets around the world start to move out of lockdown, China remains a market leader in terms of interest for investors.
4 China Daily (2020, June 19). China sees sustained recovery in spite of global economic woes
