China needs to open up its monetary markets to foreigners — however it’s an extended highway forward
A worker pours molten iron into a mold at a mill manufacturing marine engine components in Huaian, Jiangsu province, China February 11, 2019.
BEIJING — Financial institutions are betting on more business opportunities in China’s finance industry, which Beijing is eager to crack open — even if analysts say major changes are a long way off.
Regardless of the coronavirus pandemic or geopolitical tensions, Chinese authorities have stuck to plans to increase the ability of foreigners to participate in the local financial market.
Beijing would like more foreign capital to come into the country and boost international use of its currency, known as the yuan or renminbi. As China is set to grow into the world’s largest economy, foreign investors are keen to capture a share of that growth.
Some of the most recent developments in the industry are in the Chinese futures market. Investors can trade futures contracts as a way to bet on upcoming price changes, or guard against losses.
“As China introduces more international (futures) contracts such as the recent copper contract from (the Shanghai International Energy Exchange), we have been getting a vast amount of interest from our existing clients, especially from Europe some from the U.S. as well,” said Rick Chang, general manage for Greater China at U.S.-based financial data and trading software company, CQG.
The interest in copper means the commodity “has a huge potential of being a key benchmark to the market globally and regionally,” Chang said.
Greater influence in global prices
In November, copper became the latest Chinese futures contract available for trading by overseas investors via the Shanghai International Energy Exchange, or INE.
The Chinese crude oil contract that launched less than three years ago is now the third-most traded in the world for the commodity, albeit far below that of international benchmark Brent crude, and U.S. crude oil futures, WTI.
“We’ve seen an increasing number of overseas investors trading at INE covering over 20 countries and regions from five continents around the world,” the Shanghai International Energy Exchange said in a statement to CNBC.
In a sign of how much INE would like to attract foreign investors, the exchange launched online courses in English last year about the Chinese futures market.
The potential for pricing power feeds into a longer-term goal of increasing global influence.
As long as China has capital controls and foreign participation is not large enough, China’s … global influence in price setting will still be limited.
Chief China economist, Citigroup
While China is the world’s largest consumer of many major commodities, its closed financial markets have meant that prices for products ranging from iron ore to copper are set by futures contracts traded in Chicago and London.
In another step toward making the local financial market more accessible to foreigners, authorities added futures and other products in November to an investment channel that allows overseas capital into China. Known as the Qualified Foreign Institutional Investor (QFII) program, the channel previously limited foreigners to mainland-traded stocks.
Chinese firms go abroad
Reflecting growing international interest in Chinese futures, CQG strengthened its collaboration with Hangzhou-based brokerage Nanhua Futures in August through a global strategic partnership.
The deal will allow overseas access to the six international futures products currently listed on three Chinese exchanges: copper, crude oil, rubber, low-sulfur fuel oil, iron ore and purified terephthalic acid (PTA), which is used in polyesters.
Nanhua Futures has seen very rapid growth in foreigners’ trading volume, Li Lingfang, head of the international department at the brokerage told CNBC in December. In the past 12 months, growth more than doubled, she said.
Nanhua has operations in Hong Kong, Singapore, the U.K. and the U.S. The company said the top four locations for overseas clients come from Switzerland, the Netherlands and Israel, Hong Kong.
Other Chinese futures firms, such as Huatai, have also opened offices in the U.S. in the last several years.
More Chinese firms are starting to become futures commission merchants in the U.S., said JB Mackenzie, managing director of futures and forex at U.S.-based brokerage, TD Ameritrade.
“As that information (about Chinese futures) becomes more streamlined and better understood by firms globally, I think you’ll continue to see increased interest from investors outside mainland China to access (the) market,” Mackenzie said, “and you’ve already seen that uptick.”
On the business side, last year Chinese regulators removed limits on foreign ownership of futures, securities and mutual fund management companies. U.S. and European business associations in China say finance is one area in which members are able to benefit from recent regulatory changes.
Already, companies such as J.P. Morgan are working to boost their Chinese operations in the futures industry.
Fang Xinghai, vice chair of the China Securities Regulatory Commission, spoke at the Asia Futures Conference in December about the opening of China’s financial markets to foreigners.
“The U.S. futures market is a market that China has looked to for experience,” Fang said. “We look forward to having more exchange of information between the Chinese market and the American market.”
Long road ahead
However, some of the other inroads U.S. financial companies have made in China were mostly a result of the phase one trade agreement signed in January 2020. They come about two decades since China was meant to open up its financial sector after joining the World Trade Organization.
China’s strict controls on investors taking money out of the country can also deter foreigners.
“The issue at this moment (is) whether foreign investors can have free access to China’s futures and whether in the future, the futures market could allow this contract to be done in not only in renminbi but other type of currencies,” said Li-Gang Liu, managing director and Chief China economist at Citigroup.
“As long as China has capital controls and foreign participation is not large enough, China’s … global influence in price setting will still be limited,” he said.