Foreign investment in Chinese financial marke Market

Foreign investment in Chinese financial Market

Financial institutions are betting on additional commercial prospects in China’s finance industry, which Beijing is anxious to open up — despite analysts’ predictions that big changes are still a long way off.

Despite the coronavirus pandemic and geopolitical concerns, Chinese authorities have persisted in their ambitions to expand foreigners’ capacity to engage in the local financial sector.

Beijing wants more foreign cash to flow into the country, boosting the usage of its currency, the yuan or renminbi, on a global scale. Foreign investors are eager to participate in China’s expansion as it prepares to become the world’s largest economy.

The Chinese futures market has seen some of the most recent changes in the business. Futures contracts can be used by investors to speculate on future price fluctuations or to hedge against losses.

Increased impact on global prices

Copper became the latest Chinese futures contract offered for trade by international investors through the Shanghai International Energy Exchange, or INE, in November.

The Chinese crude oil contract, which was launched less than three years ago, is currently the world’s third most traded commodity, albeit far behind international benchmark Brent crude and WTI crude oil futures in the United States.

In a statement to CNBC, the Shanghai International Energy Exchange said, “We’ve observed an increasing number of overseas investors trading at INE covering over 20 nations and regions from five continents across the world.”

Last year, the exchange released online courses in English about the Chinese futures market, indicating how serious INE is about attracting overseas investors.

A longer-term goal of developing global influence feeds into the potential for pricing power.

While China is the world’s greatest consumer of numerous commodities, its restricted financial markets have resulted in futures contracts traded in Chicago and London setting prices for products ranging from iron ore to copper.

In November, regulators added futures and other goods to an investment route that enables foreign funds into China, taking another step toward making the local financial sector more open to outsiders. Previously, the Qualified Foreign Institutional Investor (QFII) programme only allowed foreigners to invest in mainland-traded equities.

Companies from China are expanding internationally.

CQG increased its engagement with Hangzhou-based brokerage Nanhua Futures in August through a worldwide strategic alliance, reflecting growing foreign interest in Chinese futures.

Copper, crude oil, rubber, low-sulfur fuel oil, iron ore, and pure terephthalic acid (PTA), which is used in polyesters, are among the six international futures goods now traded on three Chinese exchanges.

According to Li Lingfang, head of Nanhua Futures’ international section, the brokerage’s trading volume among foreigners has grown at a breakneck pace. She claims that growth has more than doubled in the last year.

Nanhua has offices in Hong Kong, Singapore, the United Kingdom, and the United States. Switzerland, the Netherlands, Israel, and Hong Kong are the top four places for international clientele, according to the company.

In recent years, several Chinese futures firms, like as Huatai, have opened operations in the United States.

According to JB Mackenzie, managing director of futures and currency at TD Ameritrade, more Chinese enterprises are starting to become futures commission merchants in the United States.

“I believe you’ll continue to see more interest from investors outside mainland China to access (the) market as that information (about Chinese futures) becomes more simplified and better understood by corporations globally,” Mackenzie said, “and you’ve already seen that uptick.”

“I believe you’ll continue to see more interest from investors outside mainland China to access (the) market as that information (about Chinese futures) becomes more simplified and better understood by corporations globally,” Mackenzie said, “and you’ve already seen that uptick.”

Companies such as J.P. Morgan are already working to expand their futures operations in China.

Fang Xinghai, vice head of the China Securities Regulatory Commission, spoke about the opening of China’s financial markets to foreigners at the Asia Futures Conference in December.

“China has looked to the United States futures market for experience,” Fang said. “We hope to see a greater interchange of information between the Chinese and American markets.”

There’s a long way to go.

However, the phase one trade agreement reached in January 2020 was largely responsible for some of the other breakthroughs achieved by US financial firms in China. They come over two decades after China was supposed to open up its financial industry after joining the WTO.

Foreigners may be deterred by China’s stringent prohibitions on investors taking money out of the country.

“At the moment, the problem is whether international investors have unrestricted access to China’s futures and whether, in the future, the futures market would allow this contract to be done in currencies other than renminbi,” said Li-Gang Liu, managing director and chief China economist at Citigroup.

The integration of China into global financial markets is speeding up. Since 2014, cross-border portfolio capital flows into China have been increasing. At the end of September 2020, foreign ownership of onshore (non-Hong Kong) Chinese equities and bonds totaled RMB5.7 trillion ($837 billion), up roughly eightfold from January 2014 levels.

The rapid rise in foreign holdings of onshore renminbi-denominated Chinese securities can be attributed to a number of causes. Since 2014, China’s stock and bond markets have developed fast, becoming too large for international investors to ignore.

The number of outlets for foreign portfolio investment has increased as well. China introduced the Bond Connect programme in July 2017, which allows overseas investors to access the China Interbank Bond Market. Institutional investors flocked to Chinese securities after they were included in global stock and bond indices, such as the Bloomberg Barclays index.

There are indications that China’s integration with global financial markets will deepen. Chinese government bond interest rates are greater than those in the United States, and a rate drop is improbable. As a result, foreign investors can earn larger returns on Chinese bonds, and the renminbi’s appreciation implies they can convert their earnings at a better rate. China’s swift economic rebound is a testament to the country’s resilience.

China’s swift economic recovery from the COVID-19 epidemic indicates Chinese industry’s profitability, which is fueling the country’s robust equities market performance.

The following are some of China’s strong points for FDI:

With 1.44 billion potential clients, it is the world’s largest domestic market.

Sovereign risk is limited because most state debt is domestic and denominated in local currency.

Foreign currency reserves and public debt held by the Chinese government and individuals are vital.

A well-developed manufacturing industry (manufacturing sector and heavy industry)

A good geographical location (close to emerging Asian markets, to Japan, maritime frontage)

Due to the economy’s quick expansion, it is the top economy in terms of purchasing power parity (PPP).

Although the situation is changing in some sectors, labour expenses remain relatively cheap.

With the expansion of the western provinces, new opportunities have arisen (particularly Sichuan province)

the creation of a new export network (Silk Road network)

The following are some of the downsides of FDI in China:

An ever-evolving legal landscape

Complicated bureaucratic and administrative procedures

A lack of openness and a lack of protection for intellectual property rights

Population ageing

Corporate indebtedness is at an all-time high.

Several industries have overcapacity in production.

A severely deteriorated environmental situation in a number of major cities

Foreigners may find it challenging to learn and utilise cultural differences in business procedures in new business environments.

Middle management is underdeveloped, and the number of qualified professionals is minimal.

In general, the Chinese government is more restrictive of foreign investment than other major economies, with numerous areas prohibited to FDI.

State-owned enterprises and “national flagships” are safeguarded (discriminatory practises, non-independent judicial power, selective application of regulations). Until recently, the Chinese government enforced compulsory technology transfer, and its intellectual property protection system was among the poorest in the world.

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