China's capital market reform: Faulty love
China’s capital market liberalization has been cautious but a more foreigner-friendly approach is emerging.
The prospect of China reforming its capital market is a little like Andy Murray’s attempts to win Wimbledon. You know they can both do it, but you can’t help but wonder if they want it enough.
Reform coupled with a big dose of protectionism has been a feature of the Chinese growth story and progress towards a more open capital market has been painfully slow. Just lately, however, Beijing seems to be making much more than a token effort to liberalize and to attract foreign investment.
The announcement by the China Securities Regulatory Committee that it will allow international fund managers with assets under management of just $500 million to apply for investment licences is important. It slashes the minimum asset requirement from its previous level of $5 billion, meaning that a fresh category of fund managers can at least consider the prospect of investing in China. This comes 10 years after the start of the qualified foreign institutional investor (QFII) programme, which has previously expanded at a snail’s pace.
It comes after the CSRC earlier this year said it would raise the amount that overseas managers could invest in China from $30 billion to $80 billion. Each application is considered on its own merits and that process remains slow. China is certainly in no danger of being overrun by Johnny Foreigner: overseas investors still account for just 1% of the free-float market capitalization in China. The CSRC has been making encouraging noises about companies being allowed to apply for investment licences online, a move that should further speed up the process of application and eventual approval.
The moves towards opening China’s economy further are being led from the top. Central bank governor Zhou Xiaochuan said recently that a range of new measures should be considered. He said these reforms should include boosting the ability of the capital markets to serve the real economy in order that direct financing can be provided to companies. He also stated that the markets needed to be more transparent, consolidating basic market mechanisms, and needed to update and improve rules on IPOs, mergers and acquisitions, and delistings.
And Guo Shuqing, chairman of the CSRC, is emerging as a key figure in efforts towards a more inclusive approach. The former head of China Construction Bank has already proved to be an energetic modernizer and is keen on attracting more foreign investment. He is also beginning to tackle the problem of China’s bond market, which is minuscule compared with the country’s GDP.
China appears to be embracing change but building momentum will be key. The same could be said for Murray.