As China's policy incentives further open the country's financial market and encourage more cross-border investment, these steps help boost the international use of the renminbi (RMB) and recognition of the RMB as an investable currency, according to a European banker.
Stock market index provider MSCI has continued the second phase of partial inclusion of Chinese A-shares in the MSCI Emerging Markets Index. The inclusion factor of existing A-shares was doubled to 5 percent on September 3.
"China is ready for international investors. China's A-share MSCI inclusion, the RMB's Inclusion in the SDR Basket, as well as Shanghai-Hong Kong Stock Connect, act as the validation that the Chinese financial market has reached a stage where it is relevant, accessible and tradable," Stefan Hoops, Global Co-Head of Institutional & Treasury Coverage with Deutsche Bank, told Xinhua in an interview.
On August 31, the China Securities Regulatory Commission drafted the Provisions on the Supervision and Administration of Depository Receipts under the Stock Connect Scheme between the Shanghai Stock Exchange and London Stock Exchange. Hoops believes that the coming Shanghai-London Stock Connect Scheme will bring lots of opportunities to both capital markets.
While global capital keeps flowing into A-shares, the bond connect, a new mutual market access scheme that allows investors from the Chinese mainland and overseas to trade in the bond markets in Hong Kong and the mainland respectively, enables global investors to enter the Chinese bond market directly.
"The bond and stock connects and China's A-share MSCI inclusion are two very important components. The bond and stock connects enable the active interest toward its way, and index inclusion not only opens the door to interested investors but also pushes all investors to increase focus on China," he said. "The level of knowledge about the Chinese market has gone up massively over the last 12 months because everybody has to think about it."
When China steps up the opening up of its capital markets and in the process makes its currency more investment-friendly, this will further stimulate RMB demand from international investors and enable more asset managers to embrace the RMB as one of their main allocation currencies, said Lee Beng Hong, China Head of Global Markets with Deutsche Bank.
Given the tremendous growth of China's economy over the last 20 years, Hoops expects that Chinese institutional investors will be increasingly interested in outbound investments and the fast-growing middle class will generate stronger demand of global wealth management diversification.
According to Hoops, Chinese outbound foreign direct investment has dramatically veered towards Europe over North America in the first six months of 2018. In July, China launched the 18th round of investment treaty negotiation with the EU, signaling its willingness towards this direction.
"There has always been some hesitation to allow Chinese corporates to do mergers and acquisitions in Europe. In the future, there will be increasing openness of European side to engage with China," Hoops said.