RMB Internationalisation: Translating Policy into Practice

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Concern about decreases in the rate of growth of China’s economy is both a pervasive and tenacious perspective in the media. While it is true that China is dealing with many troubling economic issues, the careful, incremental and long-sighted way in which reforms are being introduced should reassure international investors. Undeniably, foreign investment into China is becoming easier, and positions in Chinese capital markets can be unwound more quickly than in the past. This report describes the landscape for investment in China as well as the programs and schemes facilitating it.

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Reforms driving the internationalisation of the Chinese currency, the Renminbi, are rapidly being introduced. Approved companies can buy and sell exchange-traded bonds, A-shares, B-Shares and open- and closed-end exchange-traded funds (ETFs) listed on Chinese stock exchanges via two investment programs specifically designed to incentivise foreign investment. Recently, the Shanghai-Hong Kong Stock Connect program began providing foreign retail and institutional investors with access to a restricted set of A-Shares on the Shanghai Stock Exchange. Other steps in an incremental process to internationalise China’s capital account are also being developed.

The proposed mutual recognition of funds agreement between the Hong Kong Monetary Authority and the People’s Bank of China, which could be implemented in 2015, may provide foreign investors with more avenues to invest their money in China as well as provide Chinese investors with more ways to invest in international funds.

In February 2015, Chinese government restrictions on short-selling were lifted for foreign investors on the Shanghai Stock Exchange via the Shanghai-Hong Kong Stock Connect. This reform is likely to incentivise more hedge funds to participate in the program, and the change in investment approach across the market as a whole could have a dramatic effect on the risk profile of the largest securities exchange in China.

Published on: 13 Mar, 2015

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RMB Internationalisation — Table of Contents

  • 1.0 Introduction
  • 2.0 Foreign Direct Investment Opportunities in China
  • 3.0 Programs Facilitating Securities Investment
  • 4.0 Money Markets, Foreign Exchange and its Derivatives
    • 4.1. FX for Cross-border Funding Activities
    • 4.2. FX for Risk Management and Hedging
  • 5.0 Equities
    • 5.1. Shanghai- and Shenzhen-listed Equities via QFII and RQFII
    • 5.2. The Shanghai-Hong Kong Stock Connect Program
  • 6.0 Fixed Income
    • 6.1. The Inter-bank Market and Onshore Exchange-traded Bonds
  • 7.0 Investment Funds and Structured Products
    • 7.1. Funds Based in China with Foreign or Foreign and Chinese Assets
    • 7.2. Funds Based Offshore with Exposure to China
  • 8.0 Conclusions
  • 9.0 Appendices
    • 9.1. Glossary of Terms
    • 9.2. Table of Figures
    • 9.3. Methodology