Capital Market Slowly Opens to Foreigners?

There are more signs revealing that China is taking its first tentative step towards partly opening its capital market to foreign investors.

Tu Guangshao, secretary-general of the China Securities Regulatory Commission says the government is considering allowing foreign institutional investors to purchase A-share stocks on a limited basis.

Foreign-funded enterprises, so far barred from China's securities market, may also be allowed to list their stocks on domestic bourses, Tu says.

Tu is the latest but certainly not the first senior official to indicate a limited opening of the capital market, as China moves closer to joining the World Trade Organization (WTO).

Early this year, senior government officials in charge of financial affairs clearly expressed support for partially opening the nation's capital market.

Other recommendations include encouraging overseas listings by domestic enterprises, setting up Sino-foreign joint industrial and venture capital funds as well as joint-venture fund management companies and introducing foreign stakes in enterprises in competitive sectors.

Analysts note that China postponed its plan to open its capital market after the Asian financial crisis. However, the expected WTO accession and the economy's internal demand for foreign investment may have forced the government to open its capital market on a limited basis.

Foreign investment has been a major factor behind China's high economic growth during the last two decades and will remain so in the foreseeable future.

However, foreign investment in China plunged 12.8 per cent last year, the first decline in two decades.

Economists attribute the slide to new changes in international capital flow. They say China needs to adjust its policies.

In a global economy, acquisition and mergers have been the major form of direct foreign investment. So far, such investments are not encouraged in China.

Many economic sectors, especially the service sector, which includes banking and insurance services, are still closed to foreign investors.

China's regulators have reached a tentative conclusion that they can open the country's capital market slightly without causing serious damage to the economy.

Institutional investors now only hold 0.03 of a per cent of stock investment accounts in China and less than 11 per cent of the stocks in terms of their market value.

Zhou Xiaochuan, China Securities Regulatory Commission chairman, says China needs to use "non-conventional and creative means" to bolster its institutional investors, mainly the mutual fund sector.

Apparently, when regulators are talking of opening the capital market, what they mean is opening it to institutional investors.

Securities analysts say that China's economic goals and strategies to restructure the State-owned sector through the sale of government stakes would mean a rapidly expanding securities market.

A regulated opening to foreign capital would be very helpful for the stable and healthy development of the market, they say.



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