The further opening up of China - September 04, 2016

The further opening up of China

China started to build the link between the stock markets in Hong Kong and Shenzhen, which will probably start in November, according to Bloomberg. This will open up Chinese markets even further letting foreign investors trade more. Other changes, like better regulations are expected in the Asian country as well.

Bloomberg mentioned that the technical preparations of this “long-awaited” link are already on their way, and that “the program was approved on Aug. 16 [and] that preparations would take about four months”.

This is a rather important step as foreigners will be able to trade $64 trillion of China’s equities. Up until now, MSCI Inc. didn’t include yuan based stocks in their Emerging market index due to the barriers foreign investors had to face. These barriers will soon be gone, at least partially.

Some limits will remain after the link though. According to Bloomberg, “The daily limits for the Shenzhen link will be the same as for Shanghai’s, 13 billion yuan ($1.9 billion) for orders going north to the mainland and 10.5 billion yuan for southbound traffic”.

About the mentioned Shanghai link: it was a very important milestone in 2014 as that was the first step of China opening its stock markets. Through the link foreign investors were and are able to buy mainland equities through brokers of Hong Kong. Now another link will open up soon, creating even more possibilities.

In the meanwhile, China is also trying to create better regulations, according to recent market rumours. As we wrote about it in May, China asked for British advice on creating a financial super-regulator to improve financial oversight. This is rather important for them after the stock exchange crisis that hit China in the beginning of 2016. As a reminder how serious the situation was: the indices fell 20% in just some weeks. According to Reuters, Chinese officials believe that other countries’ solutions can’t be simply copied, but can be used as a reference. In June, China Daily (the biggest English-language newspaper of the country) also wrote about the need for a super regulator, and it mentioned possible solutions as well.

As we can see, China still has a long way to go to open up and regulate its stock exchanges, but they obviously took the first (and second) steps and they probably won’t stop there.