Chinese regulators have tried to make renminbi-denominated products more accessible
The recent link-up between the stock exchanges of Shanghai and Hong Kong marks another milestone in China’s drive to reintegrate with the international financial system. Having grown for more than three decades, China’s economy is now the second-largest in the world. China has the world’s second-largest equities market and the third-largest bond market, but these have been largely out of reach to global portfolio investors because of capital restrictions.
China is now opening up. Since 2009, Chinese regulators have made a concerted effort to make renminbi-denominated products more accessible to the rest of the world. They started by opening the trade account, then encouraged the establishment of an offshore pool of renminbi liquidity which today amounts to some RMB2.5 trillion.
For the first time, investors within China are able to trade foreign securities directly and diversify their portfolios
The People’s Bank of China has also established channels such as the Renminbi Qualified Foreign Institutional Investor scheme, which allows foreign institutions to buy into the bond and equities markets.
The latest reform is the Shanghai-Hong Kong Stock Connect. For the first time, investors within China are able to trade foreign securities directly and diversify their portfolios, while investors outside China with a renminbi account in Hong Kong have direct access to China’s stock market.
Currently, the programme involves only the stock exchanges in Shanghai and Hong Kong. The two trading links – northbound to Shanghai and southbound to Hong Kong – are subject to a daily quota and an aggregate quota.
Stock Connect has begun slowly, but using figures alone to measure its success misses the point. Stock Connect represents the most unfettered access yet to Chinese assets, giving global investors a huge incentive to use renminbi.
A total of 568 Shanghai-listed securities, representing about 90 per cent of the Shanghai Stock Exchange’s RMB27 trillion market capitalisation, have been made available to global investors. It is only a matter of time until these shares are included in emerging markets indices such as FTSE and MSCI, which will drive extra demand from exchange-traded funds.
What matters most is that Stock Connect operates as smoothly as possible. If successful, the idea could be replicated. There have been talks about implementing a similar link between the stock exchanges of Shenzhen and Hong Kong.
The ability for foreign investors to buy into the world’s fastest-growing major economy marks another milestone in China’s reintegration with the global financial system, and the renminbi’s path towards investment currency status.