Chinas Capital Account Opening Presentation to Mr Frederick Ma, SFST - - PowerPoint PPT Presentation

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Chinas Capital Account Opening Presentation to Mr Frederick Ma, SFST By Securities and Futures Commission 20 June 2003 Definition of Capital A/C Opening Relaxation and elimination of the administrative controls on cross-border

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China’s Capital Account Opening

Presentation to Mr Frederick Ma, SFST

By Securities and Futures Commission 20 June 2003

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Definition of Capital A/C Opening

 Relaxation and elimination of the administrative controls on cross-border transactions under capital account  Capital account opening does not mean automatic RMB convertibility or float – Possible relax cross-border movement of capital without full convertibility of RMB, as traders having FX at hand  Full convertibility of RMB also does not mean free cross-border movement of capital – After commitment of RMB convertibility on current account in 1996, China can still impose restrictions on imports and exports – In US, various restrictions on cross-border movement of capital by foreigners and residents  Capital account liberalization usually accompanies RMB liberalization

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Primary Objectives for Opening

  To deepen China’s financial reform  To improve financial regulation  To integrate into the global economy   To speed up and sustain the growth of its economy Different from other countries such as Philippines and Korea which wanted to attract short term capital inflows when liberalizing capital account

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Main Factors on Opening Process

 Favorable factors – High stable economic growth – Sizable FX reserves – Surplus in balance of payment – Surplus in both current account and capital account – Abundant liquidity in financial system  Unfavorable factors – Rising fiscal deficit and – Undercapitalized banking system and high NPL ratios – Immature capital market – Fear of Asian crisis-type speculative activities

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Current Account and Net FDI

20000
10000

10000 20000 30000 40000 50000 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 million dollars current account net FDI inflow

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FX Reserves of China

72.95 81.72 89.40 90.10 49.76 51.60 49.10 45.98 21.71 19.44 21.20 51.62 73.60 105.15 139.89 144.96 154.68 165.57 212.17 286.41 316.00

20 40 60 80 100 120 140 160 1991.12.31 1992.12.31 1993.12.31 1994.12.31 1995.12.31 1996.12.31 1997.12.31 1998.12.31 1999.12.31 2000.12.31 2001.12.31 2002.12.31 2003.03.31 50 100 150 200 250 300 350 Foreign Deposit (Private) Foreign Deposit (Corporate) FX Reserve

Units: USD bil. Units: USD bil. 118.93 131.48 141.00 139.20

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Suggested Principles of Sequencing

 Long-term investment ahead of short-term investment (FDI ahead of FPI)  Institutional investors ahead of individual investors  Foreign exchange denominated transactions ahead of RMB denominated  Capital inflows ahead of capital outflows (i.e. QFII ahead of QDII)

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Defining by Product and Intermediary

 Opening order by product: – Direct investment – Long-term loans – Bonds (IPO and secondary market) – Close-ended funds – Open-ended funds – Stocks (IPO and secondary market) – Short-term loans – Currency trading  Opening order by categories of investment vehicles: – Offshore inter-bank market: limited access by selected domestic banks – Offshore securities market: H shares, Red-chips, ADR and B shares – QFII: participation of foreigners in domestic securities market – QDII: participation of Mainland residents in off-shore securities market – CDR: for trading securities listed in

ff-shore markets in the Mainland

stock markets using RMB

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Capital Account Opening:

by Currency, Capital Flow Direction, and Types of Instrument

Direct investment

Inward FDI Outward FDI with approval

Stocks-IPO

2 13

Stocks-secondary market

3 14

Bonds-IPO

4 15

Bonds-secondary market

5 16

Close-ended funds

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Open-ended funds

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Long-term loans

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Short-term loans

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Trade credits

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Currency trading

Through offshore interbank markets Through offshore interbank markets

Capital Inflows <===I I===> Capital Outflows

Direct investment

No allowed No allowed

Stocks-IPO

24 35

Stocks-secondary market

25 36

Bonds-IPO

26 37

Bonds-secondary market

27 38

Close-ended funds

28 39

Open-ended funds

29 40

Long-term loans

30 41

Short-term loans

31 42

Trade credits

32 43

Currency trading

33 44

Already allowed Under discussion Not allowed Foreigners as borrowers-liabilitiy holders while Chinese as investors- asset holders Table 1. Progress of China's Capital Account Opening: Classification by Currency, Capital Flow Direction, and Types of Transaction Instruments

Not allowed Not allowed

Types of transaction instruments

Under discussion through CDR

I===> Dollar RMB <===I

Through QFII into A shares, RMB bonds, and RMB funds Under discussion through QDII China's external lending B, H, Red, ADR China forex bonds China funds (B, H, Red) China's external borrowing

Foreigners as investors-asset holders while Chinese as borrowers-liability holders

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Recent Experiment in Relaxation

f Capital Control

 Four SAFE branches, Beijing, Tianjin, Sichuan and Heiloongjiang, authorized to conduct relaxation of capital control – Each has a FX quota within which it can approve applications for overseas investments, particularly by Minying, not referring approvals to Head Office – Sources of FX to be used for overseas investment no longer checked – Risk for overseas investment no longer assessed – Repatriation of profits made through overseas investment no longer required – Restriction on industry ranges that can receive such investments relaxed

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Implications for HK

 After implementation of QDII and CDR – Equity market and bond market will benefit – Financial services markets will benefit – Fund management services – Brokerage services – Bank custodian and securities custody  More mobility of firms and capital – More small and medium-sized companies

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Challenges for HK

 More regulatory work – information sharing and enforcement cross border  Education and training – Especially for small & medium-sized companies  Avoid a new around of unsustainable bubbles  Provide value-added services

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Three Types of QDIIs

 Insurance companies – CAGR of 31.52% in past 14 years – RMB305 billion of premium income in 2002 – 54 insurance companies at the end of 2002 – A portion of their asset portfolio, RMB630bn at end of March 2003, proposed to invest overseas  FX funds – Set up FX funds to invest overseas – Targeted at FX deposits of households and enterprises – FX deposits at US$140 bn at end of March 2003  Securities companies – To set subsidiaries in HK – 124 domestic securities companies in operation

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Considerations & Information on QDIIs

 To be emphasized – An experimental step in capital account opening – A controlled and legalized channel for domestic investors, particularly for insurance companies to invest overseas – HK as playground for domestic financial institutions to accumulate international experience and build up competitive strengths – Good for both Mainland and HK  A couple of securities companies, among 7-8 applicants, expected to be approved to set subsidiaries in HK at the end of this year or early next year

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