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Macro · Equity
China's financial sector and capital markets not opening enough, CSRC Vice Chairman says
2018/06/25 07:26:19
China, MSCI, A-share

Jun 25, 2018 (China Knowledge) - China's financial sector and capital markets are not opening enough, according to Fang Xinghai, vice chairman of the China Securities Regulatory Commission (CSRC). He pointed out that the total market value of foreign holdings of China A-shares accounts for about 2% of the total market value of the total China A-shares, making further hints that more needs to be done in order to widen the access to China's financial market.

The world's second largest economy fulfilled its promises made during the Boao Fourm for Asia to open its financial sector to more foreign investment by the end of the year, when it raised foreign ownership limits to 51% in securities, futures, fund management and life insurance companies.

While opening up is a desirable process, Fang warned about the flip side, referring to the creation of asset bubbles and high valuations when the pace of supervision does not keep up with the process of financial opening.

"When foreign investors think that the bubble is too high, they will choose to withdraw their investment. At the same time, given that the domestic institutional investors in the country are relatively weak, market turmoil will surface. Therefore, from the perspective of China, in order to avoid financial risk, the most important thing is to prevent the formation of asset bubbles under the premise of openness. If there is no bubble in the assets and the valuation is reasonable, the inflow and outflow of foreign capital will be orderly and there will be no major financial risks," he said, adding further that risk management must be an eternal consideration of the country when opening up.

Following the recent inclusion of China A-shares in MSCI, Fang lauded the importance of bringing in overseas institutional investors. He mentioned that institutional investors have relatively good research on valuation, and usually have a long investment time, which is beneficial to China's A-share market. It has been more than two weeks since global index provider MSCI officially added 226 China's large cap domestic stocks to its major emerging market indexes, which has more than doubled the daily net inflow.

The June 1 inclusion with its 2.5% partial inclusion factor is part of a two-step process, with the second phase of inclusion being in September 3rd. China A-shares will initially represent about 0.39% of the weighting on the MSCI Emerging Markets Index. The addition of the next 2.5% to the index will raise China's weighting in overall index to 31.31%.

At a 5% inclusion factor, this would mean that only 5% of the market value of China A shares is included in the index, Fang pointed out. He cited plans to raise the inclusion factor to 15-20% have started to be implemented, describing the increase in the daily trading quota of Shanghai-Hong Kong stock connect and Shenzhen-Hong Kong stock connect as the first step to a higher inclusion factor.

The securities regulator vice chairman said that the country will explore deeper into allowing overseas institutional investors to use China's stock index futures and other derivatives tools to manage investment risks after they purchase China A shares. Having risk management tools will be vital to preventing these investors for entering the market for short term trades and exiting within a short space in time, he added.

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