A market monitor displays live updates at the Shenzhen Stock Exchange (XINHUA)
On July 8, the China Securities Regulatory Commission (CSRC) announced that the State Council had, in principle, approved increased access for foreign investors to the Chinese mainland stock market by allowing foreign individuals to trade yuan-denominated A-shares.
“The move is significant in expanding the financing channel of the stock market, optimizing structure of the capital market and lifting the level of opening up and internationalization of the capital market,” the CSRC said in a statement.
The easing of A-share investment restrictions is part of China’s efforts to further open up its financial sector to foreign investment and gear up the real economy. The new policy’s beneficiaries mainly consist of foreign nationals working in the Chinese mainland, and foreigners working overseas for A-share listed companies and participating in equity incentive programs.
A cooperation mechanism between the securities regulator in a foreign investor’s home country and the CSRC is a prerequisite for transactions. To date 62 countries and regions have signed 68 cooperation agreements with the CSRC.
The measure is also aimed at attracting foreign people with talent. As noted by the CSRC, Chinese securities and futures companies have entered a new era of development featuring growing cross-border businesses.
In such situations, allowing these firms to provide equity incentive programs for foreign employees and encouraging them to invest in the Chinese stock market are conducive to bringing in international financial professionals and advanced foreign market regulation approaches, which is essential for the integration between Chinese securities and futures sectors and their foreign counterparts and creating world-class securities and futures companies in China.
Moreover, the growing numbers of foreign investors in A-shares indicates that the increase in foreign capital inflow in the shape of asset allocation can be maintained.
Channels for foreign investment in the A-share market have been expanding in recent years, including the Shanghai- and Shenzhen-Hong Kong stock connect schemes and the Qualified Foreign Institutional Investor program. On June 1, Global index compiler MSCI included more than 200 large-cap A-shares into its benchmark indexes, a landmark event for the opening up of China’s capital market, and one which could bring in approximately 50 billion yuan ($7.5 billion) in incremental capital.
MSCI Chairman and CEO Henry Fernandez said that he will attach great importance to evaluating international investors’ feedback after A-shares join the MSCI indexes. There are two aspects to this evaluation, the first of which is whether the stock trading process is smooth which determines the confidence of investment. The other is whether the investors can adapt to the distinct A-share market, which has a daily trading quota for non-Chinese mainland investors, while investment through the Shanghai- and Shenzhen-Hong Kong stock connect schemes does not cover the whole market and the money is not allowed to participate in initial public offerings.
Despite the recent slump of Chinese stocks, there is an obvious trend of accelerated foreign capital flow into the A-share market. Until June 15, net money inflows through the Shanghai- and Shenzhen-Hong Kong stock connect schemes amounted to 164 billion yuan ($24.6 billion), an increase of 95 percent on last year’s 84 billion yuan ($12.6 billion).
Increased access for foreign investors could also contribute to improving the A-share market and promoting a concept of value investing. Many Chinese stock investors are accustomed to a deep-rooted notion of speculation, but now China expects more foreigners to invest, rather than speculate, in its stock market.
This is an edited excerpt of an article written by economic commentator Zhu Bangling and published in National Business Daily
Copyedited by Laurence Coulton
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