China needs to open its monetary markets to foreigners – however there’s nonetheless an extended strategy to go
A worker pours molten iron into a mold at a mill used to make ship engine components in Huaian, Jiangsu Province, China on Feb.11, 2019.
BEIJING – Financial institutions are banking on more business opportunities in the Chinese financial industry that Beijing is keen to break open – even if analysts say major changes are still a long way off.
Regardless of the coronavirus pandemic or geopolitical tensions, Chinese authorities have held on to plans to improve the ability of foreigners to participate in the local financial market.
Beijing wants more foreign capital to come into the country and encourage the international use of its currency known as the yuan or renminbi. With China set to grow to be the world's largest economy, foreign investors are keen to capture some of that growth.
Some of the latest developments in the industry concern the Chinese futures market. Investors can trade futures contracts to bet on upcoming price changes or to protect themselves from losses.
"As China introduces more international (futures) contracts such as the most recent copper contract from (the Shanghai International Energy Exchange), we have met with great interest from our existing customers, particularly from Europe, some of them from the US." said Rick Chang, general manager for Greater China at US financial data and trading software company CQG.
The interest in copper means that the raw material "has great potential to be an important benchmark for the global and regional market," said Chang.
Greater impact on world market prices
In November, copper became the newest Chinese futures contract to be traded by overseas investors on the Shanghai International Energy Exchange (INE).
The Chinese crude oil contract, which was launched less than three years ago, is now the third most traded commodity contract in the world, albeit well below that of the international benchmark Brent crude oil and the US crude oil futures WTI.
"We have seen an increasing number of foreign investors trading with INE in over 20 countries and regions on five continents around the world," the Shanghai International Energy Exchange said in a statement to CNBC.
To show how much INE wants to attract foreign investors, the exchange launched online courses in English on the Chinese derivatives market last year.
The potential for electricity pricing feeds into a longer-term goal of increasing global impact.
As long as China has capital controls and foreign participation is not large enough, China's global influence on pricing will still be limited.
Chief Economist of China, Citigroup
While China is the world's largest consumer of many important commodities, closed financial markets have resulted in the prices of products ranging from iron ore to copper being fixed by futures contracts traded in Chicago and London.
In a further step to make the local financial market more accessible to foreigners, the authorities added futures and other products to an investment channel in November that allows foreign capital to enter China. Known as the QFII (Qualified Foreign Institutional Investor) program, the station previously restricted foreigners to stocks traded on the mainland.
Chinese companies go abroad
Due to the growing international interest in Chinese futures, CQG strengthened its cooperation with the Hangzhou-based broker Nanhua Futures through a global strategic partnership in August.
The deal allows overseas access to the six international futures products currently listed on three Chinese exchanges: copper, crude oil, rubber, low-sulfur heating oil, iron ore and purified terephthalic acid (PTA), which is used in polyesters.
Nanhua Futures has seen very rapid growth in the volume of foreign trade, Li Lingfang, head of the broker's international division, told CNBC in December. In the past 12 months, growth has more than doubled, she said.
Nanhua has offices in Hong Kong, Singapore, the UK and the USA. The four most important locations for overseas customers come from Switzerland, the Netherlands and Israel, Hong Kong.
Other Chinese futures firms like Huatai have also opened offices in the US in recent years.
More and more Chinese firms are becoming futures commission dealers in the US, said JB Mackenzie, general manager for futures and forex at TD Ameritrade, a US-based broker.
"As this information (about Chinese futures) is rationalized and better understood by companies around the world, the interest of investors outside of mainland China in accessing the market will continue to grow," said Mackenzie, who had already seen this upward trend. "
On the business side, Chinese regulators last year lifted restrictions on foreign ownership of futures, securities and mutual fund management companies. US and European business associations in China say finance is an area where members can benefit from recent regulatory changes.
Companies like J.P. Morgan are already working to improve their Chinese activities in the futures industry.
Fang Xinghai, vice chairman of the China Securities Regulatory Commission, spoke at the Asia Futures Conference in December about opening up China's financial markets to foreigners.
"The US futures market is one that China has been looking for experience in," said Fang. "We look forward to a stronger exchange of information between the Chinese and American markets."
Long way ahead
Some of the other advances U.S. financial firms have made in China have largely been the result of the phase one trade agreement signed in January 2020. They have been around two decades since China opened its financial sector after joining the World Trade Organization.
China's tight controls on investors taking money out of the country can also deter foreigners.
"The question at this moment is whether foreign investors can have free access to China's futures and whether the future market could allow this contract to be concluded not only in renminbi but also in other currencies," said Li-Gang Liu, Managing Director and Chief Economist of China at Citigroup.
"As long as China has capital controls and foreign participation is not large enough, China's … global influence on pricing will still be limited," he said.