MNI INTERVIEW: China's Connect Program To Expand Capital Flows

Chinese regulators are expected to expand the Hong Kong Connect programme to facilitate foreign-capital flows into the mainland’s markets, a prominent policy advisor told MNI.

“Chinese financial regulators prefer to have a larger-scale and wider-ranging opening of the financial market, which probably means higher quota and more channels than the current Connect programme,” said Zhang Xiaoyan, chair professor of finance and associate dean at PBC School of Finance at Tsinghua University. However, authorities must time their moves carefully and account for the immaturity of China’s capital markets to ensure stability, especially as international market uncertainty increases, she said.

The People’s Bank of China and Hong Kong authorities in May launched the northbound Swap Connect, the most recent addition to the Connect programme, which allowed international investors to trade onshore interest rate swaps (see: MNI: China Seen Boosting Swap Connect As CNY Bond Demand Grows). Zhang expected regulators to increase the daily trading quota, which now stands at CNY20 billion, “based on market demand and stability.”

International investors can trade China-listed equity via programs such as Stock Connect, the Qualified Foreign Institutional Investor, RMB Qualified Foreign Institutional Investors and the Qualified Foreign Limited Partnership programmes. While the quotas for these schemes have met foreign demand for now, “they are no longer binding, “ Zhang said. She noted a recent survey conducted by her team between January 2016 and July 2019 which showed foreign investors preferred shares in the China Securities Regulation Commission’s manufacturers category, particularly companies with large market capitalisation, low price-to-earnings and turnover ratios.

CHANNEL-STYLE OPENING

Chinese authorities will insist on a “channel-type” opening of its capital markets as sharp inflows could cause volatility which could negatively impact the prominent retail makeup of China’s equity market, Zhang insisted.

“China’s welcoming stance towards foreign investors will not change as we need fundraising to grow and some professional investors could bring experience," she argued. "Competition adds to price discovery and improves market efficiency. Our survey showed foreign investors have been better informed than expected in the past decade, including on information of listed companies, regulatory rules, sector transition and so on."

Foreign capital also needs China as the country still enjoys solid growth potential while its weak correlation to western economies can provide diversification to portfolios, Zhang noted. In addition, institutional investors will find more opportunities to arbitrage or chase profitability in China’s developing markets, she continued.

YUAN INTERNATIONALISATION

The yuan’s global status, which lags China’s economic position, will also improve with further opening, Zhang noted, adding recent developments have shown the world the risks involved with a “hegemonic” U.S. dollar.

A well-accepted yuan will benefit the global community, she said. E-CNY will show the world a more convenient and efficient yuan, at a time when the currency’s use within global trade increases, she noted.