The government and regulators look to increase investment and competition in China.
China lately is signaling financial markets at home and beyond that it wants to increase investment and competition in China’ financial and banking sectors. This means that treasurers dealing with China might have an easier path to travel when it comes to banking and business financing.
On the inflow side, regulators announced April 3 that the amount that international fund managers can invest in China has been raised to almost triple the previously set amount, to $80bn from $30bn. The scheme, Qualified Foreign Institutional Investor (QFII), is one of the main channels used by foreign firms to invest in Chinese financial market.
The regulator, China Securities Regulatory Commission, said raising the quota was a step towards opening up the sector. “It is a positive experiment to further open up the market and achieve the yuan convertibility under the capital account,” the commission said in a statement. At the same time, these measures are also seen as helping boost an underperforming domestic stock market. So far this year the Shanghai Composite index is down more than 20 percent over last year.
In a separate comment, Premier Wen Jiabao spoke about the business of China’s big state-owned banks, declaring them a monopoly that needed to be broken up. Recent reports have indicated that the government is aware of a growing number of small- to medium-sized businesses that have turned to unofficial sectors for capital – at much higher borrowing costs – due to the lack of competition and other options for business owners to secure loans and capital.
Although Wen hinted at allowing private investment in the country’s banking sector, others pointed out that Wen has only one year left in his term. Therefore, the actual work of allowing more competition and capital would be a task for the next generation of leaders.
On the outflow front, China announced a trial reform package for the city of Wenzhou, allowing residents in the city to invest privately overseas and set up loan firms. Long known for its entrepreneurial spirit and status as a major hub for small-business manufacturing, Wenzhou, a city in the south-eastern Zhejiang province, has been hit hard in recent months by a cash crunch. The problem is small-business owners can’t get loans from big state-owned banks because of the higher credit risks. But under the newly launched trial program, the proposed loan companies would help small manufacturers overcome the unwillingness of big Chinese banks to lend.
The local government of Wenzhou had set up a plan to give its residents more freedom to invest overseas, but the plan was dropped as it didn’t gain the support of the central government. With the latest approval, however, residents will be able to invest in overseas investments with potential higher returns. Still, the State Council has not specified how much investment would be allowed for local investors. It also stated that if successful, the Wenzhou package could be introduced in other parts of China.
Meanwhile, in the eastern city of Shanghai, officials announced its plan to launch a pilot program that would allow both local and foreign hedge funds and others to raise yuan funds from the mainland to invest overseas. This marks yet another move by Chinese authorities to loosen control on capital flows and a furthering of their effort to internationalize RMB. According to Shanghai officials, the Municipal Office of Financial Services is still working with central government agencies to secure the plan’s details. No doubt this would be one of many steps that the city is going to take in order to become a global center for yuan clearing, pricing and trading by 2015.