China Considers Opening Capital Markets

on Jun 1, 2012
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According to a document signed by eight government departments, China pledged to open up the domestic capital markets and draft rules for overseas firms to float shares in China, Market News International reported. Through these measures, the Chinese financial markets would be able to continue to mature, and it would support a continuation of their rapid economic catch-up process.

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The vows for a more open domestic capital market came as a result of the increasing threats to the global economic recovery and the recently slowing domestic growth of China. In other words, because of the “more complicated external situation for China’s growth” the domestic market needs to become more open. This was the statement issued by eight government departments, including the People’s Bank of China and the National Development and Reform Commission. Even though short on specifics, the statement marks a reaffirmation of the long-standing policy goals as evidence shows that Chinese domestic economic activity is slowing.

!m[](/uploads/story/56/thumbs/pic_1_inline.png)Another reason for the opening of the markets is China’s ambition to make the Yuan the world’s reserve currency. Over the past three years China has been trying to internationalise its currency by conducting Yuan-foreign currency swaps with a number of countries and permitting Chinese firms to settle their trade with foreign counterparts in Yuan. Now China is continuing to steadily push forward the Yuan’s convertibility. The Chinese government stated that it will open the domestic financial markets further and “cultivate advantages in international cooperation and competition” so it can expand the overseas use of the Chinese Yuan. As part of the effort to further open up the Chinese financial market, a pilot programme will be launched to allow for Yuan-denominated listings of international enterprises in China’s domestic market. International financial organisations, overseas currency authorities and foreign companies will be allowed to invest Yuan they hold in China’s financial market. Chinese institutions will also be encouraged to do more financial and market-related business outside China, the government said without giving a timetable for the measures.

The Chinese government has been pledging for about a decade to open its domestic capital markets to sales of Yuan-denominated securities, including selling shares, by foreign parties but has so far permitted only a handful of international organisations to sell a limited numbers of bonds in the country. At the same time Chinese investors, such as banks, funds and investment companies are allowed to trade foreign-based securities only via the Qualified Domestic Institutional Investors (QDII) in a limited quota system. The government’s recently-released statement however claims to give domestic investors greater freedom to invest overseas, loosen the restrictions on cross-border transactions, promote product innovation and let more foreign investors into the domestic foreign exchange markets. As the Chinese State Administration of Foreign Exchange (SAFE) said in its 2011 annual report “China will continue to make the safety of its foreign exchange reserves its top priority this year.”

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