Financial opening will require regulatory progress

By Yang Wang and Dai Ying Source:Global Times Published: 2017/11/20 21:53:39

Illustration: Peter C. Espina/GT


China has recently taken substantial steps toward opening its financial sector, with Vice Finance Minister Zhu Guangyao revealing at a news briefing at the end of US President Donald Trump's recent visit that China will ease foreign ownership limits for financial firms.

The announcement signals a new chapter for the country's financial markets. It is anticipated that as the pledge is being implemented, China's financial markets will draw in massive amounts of international capital. However, it's worth stressing that this opening of the financial market will also bring challenges for China's financial regulators.

To protect domestic businesses that are in a comparatively weak position, countries often create restrictive policies to raise thresholds for international capital aspiring to make inroads into the country. That said, opening China's financial sector to more foreign ownership is a reflection of the country's optimism about its economy and the risk-buffering capacities of its financial sector.

The country has maintained stability in the yuan, which means foreign currency risks are predicable. Meanwhile, the capital market has the capacity to attract and utilize foreign capital inflows, thereby enhancing capital market stability. Additionally, the financial regulators have toughened oversight of the financial sector, ensuring the capital works in a legal and safe environment.

As such, the changes to foreign ownership limits will push for an equal footing between domestic investors and their foreign counterparts in the financial arena. The move will therefore facilitate capital inflows into the country, as it will help in increasing transparency in the financial markets. With two stock connect schemes linking Hong Kong with bourses in Shanghai and Shenzhen in place, as well as MSCI's gradual inclusion of mainland shares into its benchmark Emerging Markets Index, widening foreign access to the country's financial sector will funnel more foreign capital into the country.

More foreign ownership in financial firms will also stimulate overseas investors to shift from financial investment toward long-term strategic investment, and encourage them to explore the country's financial markets more deeply. At the same time, domestic insurance providers, securities firms and banks will be spurred on to transform mindsets, improve corporate governance and absorb more advanced experience so as to boost their own competitiveness.

However, the country will also face challenges as it opens the financial sector wider to foreign capital.

First, the country needs to improve its capacity to prevent financial risks. Foreign exchange fluctuations are an unavoidable issue with cross-border capital flows. Along with the opening up of the capital account in an orderly way, the yuan's exchange rate will become more influenced by capital flows. Given that capital flows are typically large-scale and difficult to manage, improved capacity to manage market expectations will be an effective method to prevent foreign exchange risks. Furthermore, the relevant regulatory authorities should be alert to potential financial chaos brought by international capital and maintain market stability accordingly. 

Second, there is an urgent need both for improved formulation and oversight of rules for the financial markets.

Foreign capital inflows will result in changes to the country's financial landscape, giving an impetus to financial innovation as well as complicating risks. The regulatory authorities will therefore be required to consider how to improve oversight and avoid delayed regulatory response to market changes. In the meantime, international investors' demand for high-quality information disclosure and a well-founded legal system that ensures investors' rights will push the authorities to improve the information disclosure system and the relevant laws and regulations, providing an institutional guarantee for foreign capital that flows into the country.

In a nutshell, the opening of the financial market represents a giant step forward for China's development of its financial system. It will make the country's financial market more of a magnet for foreign investors, but this can only be achieved if the world's second-largest economy makes full use of overseas capital to improve its financial system, enhance the global competitiveness of domestic financial institutions, and internationalize its financial markets.

Yang Wang is research director of the Hande Fintech Research Institute. Dai Ying is an assistant research fellow with the Hande Fintech Research Institute.

Posted in: INSIDER'S EYE

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