A new State Council guideline provides a roadmap to financial reform. It aims to accelerate financial liberalization, expand access to investment and trading, and strengthen institutional and regulatory infrastructure.
A bird's eye view of Lujiazui Financial District in Pudong, Shanghai, July 21. Photo from CFP
By YOU Miao
China will further open up Pudong, Shanghai’s financial district, a State Council guideline says. The guideline, published on July 15, aims to accelerate financial liberalization, expand access to investment and trading, and strengthen institutional and regulatory infrastructure. It also mentions scientific municipal governance, improved efficiency, and sustainability of urban life.
The items on financial reforms touched topics including market design, product innovation, and institutional and infrastructure setups. Shanghai will develop offshore RMB trading, widen services to foreign investors, introduce market makers to the STAR board, and build a global center for commodities pricing and trading.
On financial liberalization, Pudong will widen clearing and settlement services for cross-border RMB payments and trading. This will go hand in hand with developing offshore RMB financial derivatives starting from RMB futures. Product innovation will also take place in equities, fixed incomes, and insurance to meet investor demand.
LI Feng, an accounting professor from Shanghai Jiao Tong University, says this is an important step in internationalizing the RMB. Offshore RMB exists because capital moving in and out of China is still tightly controlled. The development of offshore RMB trading in Shanghai, where onshore RMB is currently traded, will help synchronize the two versions of the same currency, setting up the market and regulatory infrastructure that will eventually lead to their merger.
This will pose higher risk management requirements. Risk prevention and mitigation should be implemented together with innovations, the guideline says. It also urged banks to closely monitor money laundering, terrorist financing and tax evasion.
Pudong will allow qualified foreign institutional investors to trade in the tech-focused STAR board in RMB, including STAR board IPOs. It will also make it easier for Chinese companies to raise foreign-currency bonds and for foreign investors to participate in China’s bond market.
Li said these new measures will make Shanghai more attractive to international investors. “China is the second-largest bond market in the world, but right now foreign investors hold less than 5 percent of the total volume,” he said. “Widening international participation will also make RMB denominated assets more liquid and influential in the global market, which in turn also accelerates RMB internationalization.”
The guideline also signals significant reforms in market design. The STAR board will introduce market makers. Shanghai Futures Exchange will set up infrastructure to expand commodities trading, including a national commodities warehouse receipt registration system, and the necessary clearing, settlement, and taxation services to support bonded warehouse receipt trading. In addition, Shanghai will build a national precious metal reserve warehouse, launch more oil, and gas products, and explore the application of blockchain technologies and digital currencies in securities trading. It will also potentially enable more institutional investors or even individuals to buy and sell shares in private equity and venture capital funds.
Notably, the guidelines also mention developing Shanghai’s insurance industry, especially the reinsurance subsector.
Li said that the introduction of market makers will improve the pricing and trading mechanism. Opening up secondary market trading of private equity and venture capital shares will make transactions more transparent and liquid. A well-developed commodities market with efficient pricing will energize the real economy.
The guideline also urged more comprehensive regulation. Robust risk management processes should be established to monitor and assess risks incurred amid financial innovation. There should also be protocols in place so that actions are when needed. Regulations must be compatible with those in the global market. The public and private sectors should work together to improve information disclosure and make the market more transparent.