China’s approach towards capital markets reform – sticking to a deliberate pace – has often infuriated market participants. From the liberalization of bond markets to the granting of licences for Sino-foreign securities joint ventures, Beijing has developed a model of piloting measures in a controlled environment before gradually broadening their reach once the implications are understood. This can make for agonizing waits for those who wish to make money fast from the world’s most promising market but it also reveals an intelligent attitude towards reform that is often not given sufficient credit.
Take the late March announcement that Beijing would allow stock index futures trading to begin as soon this month. The initial reaction from some market participants was something akin to annoyance at the high barriers to entry. Investors who wish to trade these contracts will require Rmb500,000 ($73,000) to open an account, and are expected to be required to post cash margins of at least 15%. They will need to pass exams set by responsible futures brokerages to assess their suitability. They also are expecting to have to demonstrate a safe trading record of mock trades before they can get their hands on the real thing.
The government’s first priority, say sources in Shanghai, is to serve the hedging requirements of domestic investors. The second echoes a global concern. Chinese regulators are uneasy about derivatives, and eager to control their use by bringing the market on to exchanges rather than allowing deals to take place over the counter. The move indicates a willingness to consider the beneficial uses of derivatives that might placate market participants who feared a backlash against the products after events last year in which state-owned companies were hit by losses from currency-related derivatives. The companies threatened to renege on their contracts, and both the local banks that act as middlemen in the market and the foreign banks that often structured the original derivatives could do little but await the verdict. No bank is likely to take a large Chinese state-owned company to court over such a contract.
The development of a highly regulated programme for the trading of futures based on the performance of the stock exchange is somewhat different from the currency contracts that caused all the trouble last year but it is proof of a more open-minded attitude towards financial reform than China’s regulators are often credited with. Impatience is understandable given the debate taking place around more far-reaching issues such as the appreciation of the renminbi. That debate has become fiercely political and there is no space here to get into its intricacies, but it is important to contextualize such discussions with the recognition that China’s government and regulators can and do recognize the need for reform on other issues.
This is not to imply perfection. China faces grave problems in managing both its economy and financial markets, and to praise one aspect of the manner in which reform is handled is not to imply that there are not real problems elsewhere. But those who make the decisions about the country’s financial markets are playing a long game, and the savvier market participants have always known that they must do likewise.
