The Chinese mainland stock market surged on Tuesday as securities regulators ramped up efforts to stabilize market expectations and confidence through various regulatory measures, which may present a rare opportunity for foreign capital to return to the market. Aimed at maintaining financial stability, these regulatory efforts will further serve China’s long-term goal of promoting high-level financial openness.
Several Chinese brokerages, including state-owned China International Capital Corp (CICC), restricted the amount of cross-border swap transactions investors could undertake, Reuters reported on Monday, citing anonymous sources familiar with the matter.
The reported restriction comes as the securities regulators seek to limit short-selling pressure on mainland stocks to avoid abnormal volatility. Since over-the-counter cross-border derivatives are a way for Chinese onshore funds to side-step restrictions on capital flows, there are concerns that cross-border capital controls could be strengthened due to regulatory efforts aimed at avoiding capital outflows and downward pressure on domestic stock markets.
Such concerns may be understandable, especially given the recent market volatility. Yet, fundamentally speaking, the pursuit of maintaining financial stability will only be conducive to China’s push for financial openness. By any measure, financial stability is one of the attractions for foreign investors.
Opening-up is a basic national policy China has long adhered to, an important driving force for the reform and development of China’s financial sector. China recently introduced more than 50 new measures to open up its financial sector, Xiao Yuanqi, deputy head of the National Financial Regulatory Administration, told a press conference last month.
For instance, China scrapped restrictions on the proportion of shares held by foreign investors in Chinese banking and insurance institutions, including restrictions on foreign investment participation, acquisition and capital increases.
Foreign investors can now hold 100 percent of the shares of a banking or insurance institution in China, and the potential business scope of a foreign banking or insurance institution is now exactly the same as its Chinese counterparts, according to Xiao.
As of the end of 2023, foreign-funded banks had opened 888 business branches in China, with total assets hitting 3.86 trillion yuan ($543.32 billion), while overseas insurance institutions had established 67 business branches and 70 representative offices by the end of last year, with total assets hitting 2.4 trillion yuan.
China attaches great importance to financial risks and security issues in the process of steadily advancing financial openness. This is because it does face some risk factors both in the domestic and global financial markets. Globally, investors are closely watching when the US Federal Reserve’s monetary policy will change direction and shift from a tightening stance, which has already put great pressure on economic and financial systems in the US and the world as a whole.
Domestically, the major difficulties and challenges facing the Chinese economy, like consumption and investment, are mainly concentrated on how to stabilize expectations and confidence. There is no denying that the stock market, mirroring investors’ confidence in the nation’s economic prospects, has been undergoing pressure these days.
But with measures aimed at stemming the recent plunges, Chinese regulators have showed their determination and ability to prevent financial risks and boost investor confidence in line with the nation’s own pace and the global situation, for the purpose of maintaining financial stability.
For instance, the China Securities Regulatory Commission (CSRC) noted on Monday that it has zero tolerance for market misconduct, including “vicious short selling.” The watchdog also warned against market manipulation, and put fresh curbs on securities lending and short selling, and curbed the use of derivatives that exacerbate the market slump.
Central Huijin Investment, a unit of China Investment Corp, said on Tuesday it had increased investments in index-based exchange-traded funds recently and will buy more “to maintain the stability of the capital market.”
Facts show that the A-share market has deviated from the actual situation of China’s economy, which is related to the rules and regulations of the stock market. The securities authorities have already noticed this. Since the beginning of this year, foreign capital that withdrew from or took a wait-and-see approach toward the market last year has begun to re-enter the Chinese stock market, and several foreign research institutions have made positive forecasts for the A-share market.
China’s financial market still faces many development challenges, with various problems to be solved, such as how to balance the financing and investment needs of the stock market. But in the long run, the development of the stock market must be in the direction of financial stability and serving investors, conducive to the major goal of China’s financial openness.