April 11, 2018 / 12:05 PM / 7 months ago

Breakingviews - China’s financial market door only opens inward

Investors look at an electronic board showing stock information at a brokerage house in Shanghai, China, March 7, 2016. REUTERS/Aly Song/File Photo TPX IMAGES OF THE DAY - S1AETJYOONAA

HONG KONG (Reuters Breakingviews) - China’s latest financial opening promises go in one direction. Central bank governor Yi Gang on Wednesday pledged to lower ownership barriers for foreign financiers by the end of the year, and added that a stock trading link with London could open in the same timeframe. Meanwhile China’s securities regulator quadrupled the daily stock trading quota with Hong Kong, clearing the way for foreign funds to buy more mainland equities. In keeping with long-standing Chinese practice, the reforms will enable more foreign money to flow into China, but not the other way around.

The latest concessions appear designed to defuse trade tensions with the United States. In speech on Tuesday, President Xi Jinping made conciliatory gestures toward U.S. President Donald Trump, which included repeating oft-made promises to ease access for overseas banks, brokerages, funds and insurers. Skeptics suspected Xi’s pledge to implement the changes “as soon as possible” meant further delays. Yi’s willingness to commit to a timetable partly assuaged those concerns.

Meanwhile, the China Securities Regulatory Commission upped share trading quotas for the schemes that link the Shanghai and Shenzhen exchanges to Hong Kong to $8.3 billion per day. The move will make it easier for index funds that track MSCI’s emerging markets to add to 230 large-cap onshore stocks to their portfolios. A similar trading link with London may facilitate a further influx of European money into Chinese stocks and bonds.

Both moves leave China’s capital controls firmly in place, though. While foreign institutions will be allowed to own a bigger chunk of their domestic joint ventures, they will still be largely barred from offering offshore assets to Chinese investors. The stock connect schemes, meanwhile, are designed to prevent capital outflows: Chinese investors can buy Hong Kong stocks, but the funds are converted back into yuan when they sell. Besides, even the current quotas go largely unused; on Wednesday, for example, foreign investors used only 248 million yuan of the 13 billion yuan available to buy shares in Shanghai. China may be opening its financial market door wider than before, but it only opens inward.

Breakingviews

Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.


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