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Market Opening – Predictable and Steady Progress

2019.06.20 XIE, Qing (Natasha)

China’s most senior financial officers recently gathered in Shanghai at last week’s 11th Lujiazui Forum. In addition to delivering speeches, a new science and technology innovation board (“SSE STAR”) was launched.


These speeches focused on the capital markets and introduced some specific measures for market opening, thereby reassuring and encouraging the market’s expectations on the opening up of China’s financial markets. 


In his speech, LIU He, Vice Premier of the State Council, raised several key items relating to capital markets, which together provide some useful insights as to the financial regulators’ mindset towards financial reform and opening up. 


The five key tasks, according to Liu, will be to: (1) Accelerate the reforms of various basic systems for stock issuance, listing and delisting; (2) Improve the overall quality of listed companies by focusing on corporate governance and information disclosure; (3) Promote reform of the trading system in order to improve market functioning and facilitate investment; (4) Increase the capabilities of market intermediary institutions; (5) Steadily promote the growth of all types of institutional investors. 


YI Huiman, Chairman of the China Securities Regulatory Commission (CSRC), noted that regulators shall “push for the capital market to continue opening up”, while holding firm to the principle of "having confidence in the further opening up of the markets, and ensuring that regulation is ‘see-through’ and risks are well-managed”, and “continually improving risk prevention and cross-border supervision”. His comments reflect the financial regulators’ attempts to find a balance between their desire to promoting opening up while at the same time minimizing any risks. 


After Yi had announced nine specific measures for the opening up of the capital market at the Forum, the CSRC provided further details on its website, the key points of which are summarized below:


(1) Among the more significant measures are the proposed amendments to the QFII/RQFII rules, which will impact in four respects, namely, unifying the qualification requirements for QFIIs and RQFIIs, expanding the permissible investment scope, making investment activities more convenient, and strengthening continuous supervision. It is expected that the proposed new rules will be issued very soon. Meanwhile, in his speech at the Forum, PAN Gongsheng, Deputy Governor of the People’s Bank of China, noted that the regulators are investigating whether to further relax the investment quota of QFII/RQFII or even potentially remove the quota restriction altogether. We anticipate that this round of proposed reforms to the QFII/RQFII system will, to a large extent, meet the positive expectations of the market. 

(2) In line with the principle of equal treatment for domestic and foreign investors, a foreign investor will be permitted to invest in no more than two securities companies, of which just one can be majority-owned by that foreign investor. The same restriction will apply to a foreign investor’s investment in mutual fund management companies. There will be lowering of the minimum double RMB 100 billion thresholds for the net asset and principle business income made by a controlling shareholder of a securities company, as prescribed in an earlier consultation paper. These changes indicate that the equal treatment to domestic and foreign investors is being adhered to as a fundamental principle. In terms of market access, regulators will encourage high-quality foreign securities companies and mutual fund management companies to do business in China, provided that they possess the relevant qualifications or meet the relevant requirements established for both domestic and foreign investors.

(3) The market access restrictions on foreign banks engaging in securities investment fund custodian activities will be further relaxed; a foreign bank will be allowed to independently apply for the custodian qualification for securities investment funds, and possessing the qualification to be a clearing participant is no longer a prerequisite for conducting custodian business. In addition to the Standard Chartered Bank, which has already obtained the custodian qualification, there are likely to be further foreign banks operating in China that will consider applying for the custodian qualification. 

(4) There will be a rolling out of H-share “full circulation” reform, with all unlisted foreign shares of an H-share company able to be traded in public markets. This change suggests that the foreign ownership limits on single stocks in the A-share market may also be removed in the very near future. 

(5) There will be a further expansion in the scope of the specific types of futures products that can be directly accessed by foreign investors. It is expected there will be a gradual expansion in the range of specific future products available to foreign investors, though currently still limited to commodities futures and options.

(6) Securities-type investment funds launched by foreign-owned private fund managers will be allowed to trade southbound in the Stock Connect, meaning that the current policy restriction on southbound trading by such private funds will be removed. 

(7) As for the opening up of exchange-traded bond markets, the CSRC has proposed to base this upon a review of the earlier opening up of the interbank bond market, to study to expand the access by foreign institutional investors to the exchange-traded bond market beyond the current QFII/RQFII channel, and to introduce administrative measures for Panda Bonds issuance in the exchange market. 


The Forum has delivered a clear message about the regulators’ commitment to the promotion of market opening, which should help to reassure any concerns on the part of foreign investors’ towards market opening. At the same time, the references to "having confidence in further opening”, “see-through regulation” and “risks well-managed” are indicative of the regulators’ desire to adopt a prudent and practical approach in their supervision of the financial industry.   

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