SECURITIES SERVICES: CHINA’S CAPITAL MARKETS
balancing act
China’s
China’s 14th Five-Year Plan for self-sufficiency has not stopped the country’s pursuit of renminbi internationalisation. flow examines the progress of the country’s ambitious capital market liberalisation reforms, and how it is balancing investor appetite with the management of currency inflows and outflows
S per year.1
ince opening up to foreign investment and trade in 1978, China’s GDP growth has averaged almost 10% Fuelled by its accession to the
World Trade Organization (WTO) in 2001, its transformation into a manufacturing powerhouse, and growing domestic consumption, the country is now only second to the US in terms of purchasing power parity. Behind these milestones are a set of unique weapons in a growing arsenal of economic prowess.
China has devoted significant resources to expanding its economy and global influence. Massive infrastructure programmes − such as the Belt and Road Initiative (BRI)2 launched in 2013 − are indicative of the country’s ambitions on this front. As at September 2020, the value of BRI projects totalled US$4.3 trillion.3
Although China has
faced challenges – not least periodic bouts of stock market volatility and its strained trade relationship with the US – its economy is proving to be incredibly buoyant.
Covid-19 has provided a timely reminder of the country’s economic strength. Yi Xiong, Chief Economist, China, at Deutsche Bank Research, notes that had the pandemic
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not happened, China would have met its 6.5% growth target for 2016–2020 set by the Communist Party’s 13th Five-Year Plan (FYP), but only “by a very thin margin”. Actual GDP growth for the period averaged 5.77%. “China’s economy has proven to be extraordinarily resilient to Covid-19,” says Xiong. “Economic growth is now more dependent on internal consumption as opposed to demand for exports.”
In Xiong’s and Research Associate Grant Feng’s March 2021 white paper, China Macro: The 14th Five-Year Plan: 20 Targets for 2025, they note the FYP’s omission of average yearly growth targets, which were the centrepiece of previous editions. “Instead, it states that growth targets will be set each year, depending on conditions,” notes Xiong. “China is wary of committing itself when it does not know whether America will choke off its supply of high- end semiconductors, among other things.”
Although now less concerned with growth than self-sufficiency, China is pushing ahead with several ambitious market liberalisation reforms, as the country looks to internationalise the renminbi (RMB) by turning it into the reserve currency of choice
for central banks. Greater international usage of the RMB, and providing foreign investors with more confidence in the currency, are offset by the necessity to maintain or even restrict currency inflows and outflows. This article examines how China is achieving this balance.
A market punching below its weight The introduction and extension of cross- border platforms such as Stock Connect,4 Bond Connect5
Market (CIBM) Direct6
and China Interbank Bond over the past decade
have enabled foreign asset managers to access China’s financial markets without the need to incorporate a local entity in the country. The result has been increased international flows into the Chinese equity and fixed income markets. For example, offshore investors increased their holdings of Chinese interbank market bonds by nearly 50% in 2020 to top US$500bn for the first time, according to Reuters data from 7 January 2021.
According to the China Foreign Exchange Trade System (CFETS) and National Interbank Funding Centre (a sub-institution directly affiliated to the People’s Bank of China (PBoC) that provides a series of
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