A decade of transformation turns China's financial market into larger global presence

* China's financial market, young and fast-growing, is at a new outset to open up further to the global markets, building on the transformative steps it has taken in the past decade.

* Over the past decade, China's financial market has sharpened its appeal to investors worldwide through reforms to render a more market-oriented and rules-based environment.

* On top of the accomplishments over the past decade, analysts and officials say there is still a huge potential to be tapped before China gains a presence deserving of its size in the global financial market.

BEIJING, July 4 (Xinhua) -- China's financial market, young and fast-growing, is at a new outset to open up further to the global markets, building on the transformative steps it has taken in the past decade.

The country's equity market and bond market expanded 238.9 percent and 444.3 percent respectively over the past 10 years, now both the second largest worldwide, official data showed.

It has also attracted more foreign investors and institutional investors, diversified investment options, and given rise to a bevy of world-class industry bellwethers.

"Looking ahead, China's financial sector will remain committed to unremitting reform and opening up to ensure long-term stability," said Chen Yulu, vice governor of the People's Bank of China, at a recent press conference.

Photo taken on July 22, 2019 shows the debut ceremony of China's sci-tech innovation board (STAR market) at the Shanghai Stock Exchange in Shanghai, east China. (Xinhua/Fang Zhe)

BETTER PLAYING FIELD

Over the past decade, China's financial market has sharpened its appeal to investors worldwide through reforms to render a more market-oriented and rules-based environment.

"A major milestone is the introduction of a registration-based initial public offering (IPO) system, which signifies that China's capital market is taking the market-oriented turn," said Wu Xiaoqiu, former vice president of the Renmin University of China and president of its China Capital Market Research Institute.

The country vowed to carry out the system in a decision adopted at the Third Plenary Session of the 18th Central Committee of the Communist Party of China in 2013. It was first piloted at the sci-tech innovation board at the Shanghai Stock Exchange in 2019.

It helped improve the transparency of China's capital market and spur innovation and growth potential of listed companies, making the equity market more investment-worthy and paving the way for further opening of the capital market, said Wu.

To tilt financing more in favor of smaller companies and innovation-powered ones, China launched the sci-tech innovation board in 2019 and the Beijing Stock Exchange in 2021 in supplement to the blue chip-dominant main boards of the Shanghai and Shenzhen bourses.

Photo taken on Nov. 14, 2021 shows an exterior view of the Beijing Stock Exchange in Beijing, capital of China. (Xinhua/Li Xin)

Official data showed that 46 of the around 2,200 Chinese listed firms in emerging industries are each valued at over 100 billion yuan (about 14.9 billion U.S. dollars), up from zero 10 years ago.

The market is given an increasingly prominent role in China's financial sector to discern the quality firms and sift out the underperformers. In the A-shares, funds now distinctively favor firms with robust earnings, said Li Chao, vice chairman of the China Securities Regulatory Commission (CSRC), adding that companies delisted between 2019 and 2021 more than tripled that of the previous decade combined thanks to an upgraded regulatory mechanism.

The rule of law is also being strengthened in the capital market. The new securities law effective since March 1, 2020, and a series of regulatory documents raised penalties for financial crimes, while the "zero-tolerance" policy of law enforcement enhanced deterrence.

In a nod to the evolution of China's capital market, major global benchmarks like MSCI, FTSE Russell, and the S&P Dow Jones have included the A-shares and strengthened their weightings. China's government bonds also made their way into three major global bond market indices.

HAPPIER PARTICIPANTS

A welcoming playing field has benefited financial institutions and investors from home and abroad.

"The expansion of China's capital market in the past decade spawned and nurtured financial services providers, including brokerages, mutual funds and banks," said Zhai Chenxi, vice president of TF Securities.

The total asset of China's futures and securities brokers increased 5.5 times over the period, while public offering funds now manage 26 trillion yuan of assets, nine times that of 10 years ago.

To attract foreign investors, China scrapped foreign ownership caps for securities, fund management, futures, and life insurance firms; and launched the Shanghai-Hong Kong, and Shenzhen-Hong Kong stock connect schemes. It also allowed eligible overseas institutional investors to invest directly or through connectivity in the exchange bond market from June 30.

As a result, overseas entities' holdings of domestic renminbi (RMB) financial assets have increased by 2.4 times compared with 10 years ago, while the weighting of the RMB in the International Monetary Fund's Special Drawing Rights basket has risen from 10.92 percent in 2016 to 12.28 percent.

File photo shows an exterior view of the Shanghai Stock Exchange at Pudong New Area in Shanghai, east China. (Xinhua)

"China has made substantial progress in opening its financial market and integrating its markets into the global markets over the past few years, and we definitely expect that momentum will remain strong," said Samuel Fischer, Deutsche Bank's head of China onshore Debt Capital Markets and deputy Beijing Branch manager of Deutsche Bank (China) Co., Ltd.

"Deutsche Bank is a big promoter and beneficiary of China's financial market opening," Fischer said. China's opening of its bond market and simplified market access rules for foreign bond issuers through Panda bonds served as a big tailwind for the bank to develop its businesses, he said.

Many other foreign-funded institutions also saw their businesses grow, buoyed by China's financial opening. Last year, UBS Securities and Credit Suisse Securities (China) Limited reported net profit hikes of 130 percent and 283 percent respectively.

The rise of institutional investors and foreign capital benefits all market participants, including individual investors, because they provide long-term funds that reward best-performing firms and can help absorb excessive market volatility, said Zhai.

Institutional investors and foreign funds held 22.8 percent of the total value of tradable shares by the end of May, up by 6.9 percentage points from 2016, official data showed.

Photo taken on Oct. 19, 2020 shows an exterior view of the People's Bank of China in Beijing, capital of China. (Xinhua/Peng Ziyang)

TOWARD THE CENTER STAGE

On top of the accomplishments over the past decade, analysts and officials say there is still a huge potential to be tapped before China gains a presence deserving of its size in the global financial market.

At present, RMB accounts for only 2.79 percent of global forex reserves. Foreign investors' holdings in China's stock and bond markets stand at a relatively low level of 3 percent to 5 percent compared with economies such as Japan, the Republic of Korea, and Brazil.

"China will eventually be home to a top financial center of the world," said Wu. To achieve this goal would require better transparency, rule of law, the long-term credit of the RMB, and stronger listed companies, he said.

Industry insiders also called for further facilitating foreign access to the Chinese financial market.

A staff member walks past the Shenzhen Stock Exchange in Shenzhen, south China's Guangdong Province, Sept. 21, 2020. (Xinhua/Mao Siqian)

Authorities are on the move. The registration-based IPO system, now extended to the Beijing Stock Exchange and the tech-heavy ChiNext market on the Shenzhen Stock Exchange, will be implemented across the board to further improve the quality of China's listed firms.

The country will expand the scope of Shanghai-Hong Kong and Shenzhen-Hong Kong stock connect schemes and offer overseas investors more cross-border investment and risk management products, said Wang Jianjun, vice chairman of the CSRC.

It will also build up supervision capacities and enhance cooperation with other countries, he added.

Overseas investors have acknowledged the appeal of RMB assets, with more than 60 percent of overseas financial institutions surveyed by the Bank of China saying they will increase their holdings of RMB-denominated assets.

Many global financial institutions expanded their footprints in China, a token of their faith in the country's continued financial opening. UBS and Credit Suisse Group increased stakes in their respective brokerages on the Chinese mainland, while JP Morgan, Goldman Sachs, and Citigroup are actively staffing up.

"We are strong believers in the long-term growth prospect and the abundance of opportunities that the Chinese financial market and its continued development offers," Fischer said.