China Invites Foreign Traders to Invest

Regulations that limit foreign investment into Chinese financial markets relaxed

China Invites Foreign Traders to Invest

In a show of good faith, China announced earlier in the week that it is preparing to relax regulations that limit foreign investment into Chinese financial markets. Throughout modern China’s rapid economic growth over the past several decades, the Chinese government has held a tight grip over the economy, including limiting certain kinds of foreign investment. But at the US-China Strategic and Economic Dialogue earlier in the week, Chinese officials said they were prepared to open China’s financial markets to the world.

At the meeting, China announced that it would provide a 38 billion yuan quota for US investors looking to buy either bonds or stocks. Currently, the only country with a higher quota is Kong Hong at 270 billion yuan. The move to allow easier access for US traders is one meant to increase foreign investment and help create new sectors of growth. China’s economy has been underperforming as of late, and its traditional manufacturing and high export model are becoming less lucrative. The countries now plan to transition to a more modern economy, which will require mature financial markets and foreign investment.

Previously, the United States had little access to yuan trading centers. US companies would most often have to use international partnerships to have access to yuan trading and clearing. This proved to be costly and time consuming for US companies. But with this new agreement, the US stands to become a major center for yuan trading activity. The agreement between the world’s two largest economies stipulates that one bank in each country will be chosen as clearing banks and act as trading centers for US-China yuan transactions. The combination of this agreement with the quota agreement will provide US investors with meaningful access to China’s financial markets.

China will also benefit from this agreement enormously. Recently China’s yuan was accepted into the IMF’s selection of global reserve currencies, giving it serious advantage in the global economy. The Chinese government hopes to see the yuan used in international transactions across the globe, giving Chinese companies a competitive edge. At the same time, China’s transition into a more developed market requires international cooperation and investment. Previously the majority of foreign investment went to manufacturing activity. But now that China’s manufacturing sector is becoming less important, the country must provide new avenues of investment for foreign investors.

Officials from both the United States and China came together to make this deal happen. At the meeting in Beijing, US Treasury Secretary Jack Lew said the landmark deal between the US and China would increase competition and opportunities for US investors. A consortium of top names in finance created the proposals for the two nations and created the set of guidelines. This group included Henry Paulson and Timothy Geithner, two previous Treasury Secretaries, and billionaire Michael Bloomberg.

Read more analytical reviews at Alpari.com.

As of 14:16 BST, Monday, 20 June, USD/CNY share price is 6.5671.

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