A Widening Door

By Zhang Jiuqin

China has been accelerating the opening up of its capital market in recent years.

To further facilitate investment by foreign institutions through different channels， China lifted restrictions on foreign ownership in some industries one year in advance， originally scheduled for 2021. It scrapped foreign ownership limits on futures companies on January 1， and will further lift restrictions on foreign ownership of fund management and securities companies nationwide on April 1 and December 1， respectively.

Toward high-quality growth

The opening up of the capital market is necessary for driving high-quality economic development. As China pushes ahead with economic restructuring， it has advanced domestic reforms and widened opening up to address problems caused by structural adjustments and promote a modern economic system. As a key driving force for this development， the capital market can inject impetus into the domestic economy through further opening up.

Since China has shifted the focus from high-speed growth to high-quality development， domestic industries that underpin economic growth are experiencing a demand for upgrading industrial structure and improving efficiency and quality. Along with the opening up of the capital market， traditional industries can be transformed and upgraded as enterprises improve industrial chains through mergers and acquisitions， optimize fund allocation and ease the pressure caused by fund shortages through improving stock and increment. Emerging industries， such as energy conservation and environmental protection， information technology， biology and high-end equipment manufacturing， cannot thrive without the capital market， which can buoy industries with its fi nancing and information gathering functions.

After years of transformation and adjustment， Chinas economic landscape has seen major and profound changes. While the role of investment and exports in driving domestic economic growth has weakened， domestic demand， especially in consumption， has played an increasingly important role as a major driving force for stable and high-quality economic growth. Opening up can help sustainable and sound development of the capital market and ensure its wealth effect.

The growth of innovation-oriented enterprises also calls for the support of the capital market. Viewed as a decisive factor in Chinas economic restructuring， innovation can be achieved by market participants through improving the efficiency of resources， even though it also features great instability and uncertainty. The capital market can accelerate the development of innovation-oriented enterprises since the biggest difference between these and traditional enterprises lies in the fi nancing focus during their lifecycles.

Traditional enterprises mostly experience fi nancing demands in their mid-to-late stages， which meets the requirements of indirect financing risk control. In contrast， innovationoriented enterprises need fi nancing in the initial phase of their lifecycle and need to turn to direct fi nancing. However， only a small portion of Chinas asset-light and small-sized innovationoriented enterprises can access direct fi nancing due to many restrictions. In the fi eld of indirect fi nancing， innovation-oriented enterprises face diffi culties caused by incomplete fi nancial data， insuffi cient credit or lack of collateral. The opening up of the capital market can promote multitiered capital markets and expand financing channels for them， which will help solve the most urgent financing problems facing these companies in their initial phase.

A better environment

The opening up of the capital market can also improve the market environment. Although the domestic capital market has seen great progress in recent years， there are still problems such as Ponzi schemes in the primary market， too many individual investors in the secondary market and manipulation of accounting valuation. Opening up can help improve the capital markets weak supervision system and address problems caused by limited types of participants， incomplete information disclosure， and unsophisticated laws and regulations.

In addition， a capital market needs diverse investors. Opening up can improve the structure of the capital market by introducing foreign institutions to optimize the structure of investors. The introduction of full-fledged market rules and concepts can also put investment concepts in the capital market in line with international markets， improve the risk awareness of domestic investors and promote its sound development in the long term.

Efforts to attract foreign funds into Chinas market will not only enhance the support of direct fi nancing for economic development but will also help address longstanding problems like financing difficulties for domestic private enterprises. Currently， Chinese private enterprises， which are mainly small and medium-sized， contribute more than 50 percent of Chinas tax revenue， over 60 percent of its GDP， more than 70 percent of technological innovation and more than 80 percent of urban employment. Therefore， private enterprises will play an increasingly important role in driving Chinas high-quality economic development. Since the greatest problem facing these enterprises is still inaccessible and unaffordable fi nancing， a more open capital market can meet the financing demands of private entities， provide appropriate fi nancing tools and address the mismatch between the old capital market and enterprisesdemands.

The opening up of the capital market can also contribute to the internationalization of the renminbi. As the yuan gets increasingly internationalized， the demands for renminbi assets in terms of volume， types and liquidity will increase， thus requiring further opening up of the capital market. The move can also improve the participation of foreign capital in domestic capital market activity and enhance demands for the yuan， promoting its internationalization.

2019 Measures to Open Up Chinas Capital Market

● Yi Huiman， Chairman of China Securities Regulatory Commission（CSRC）， announced nine policies and measures to further the opening up of the capital market at the 11th Lujiazui Forum on June 13， 2019.

● The Shanghai-London Stock Connect scheme was launched on June 17， 2019.

● China and Japan initiated cross-listing of exchange-traded funds based on the schemes of qualified institutional investors on June 25， 2019.

● The Office of Financial Stability and Development Committee under the State Council announced on July 20， 2019， 11 policies and measures to further open up the fi nancial industry.

● The CSRC convened a symposium on comprehensively deepening reform of the capital market and listed 12 priorities on September 9-10， 2019. One of the highlights wa s to accelerate highlevel opening up of the capital market， to implement measures for the opening up and to maintain financial security in an open environment.

● On September 25， 2019， the State Administration of Foreign Exchange announced the abolition of investment quota restrictions for Qualified Foreign Institutional Investors and Renminbi Qualifi ed Foreign Institutional Investors.