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

China’s 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 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 2 2

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 3 3

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 4 4

Current Account and Net FDI 50000 40000 current account net FDI inflow 30000 million dollars 20000 10000 0 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 -10000 -20000 5 5

FX Reserves of China Units: USD bil. Units: USD bil. Foreign Deposit (Private) Foreign Deposit (Corporate) FX Reserve 160 350 141.00 139.20 316.00 140 131.48 300 286.41 118.93 120 51.60 49.10 250 49.76 100 212.17 45.98 200 80 165.57 154.68 150 144.96 139.89 60 105.15 100 90.10 89.40 40 81.72 72.95 73.60 51.62 50 20 21.71 21.20 19.44 0 0 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 6 6

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) 7 7

Defining by Product and Intermediary  Opening order by product:  Opening order by categories of investment vehicles: – Direct investment – Offshore inter-bank market: limited – Long-term loans access by selected domestic banks – Bonds (IPO and secondary market) – Offshore securities market: H shares, Red-chips, ADR and B – Close-ended funds shares – Open-ended funds – QFII: participation of foreigners in – Stocks (IPO and secondary domestic securities market market) – Short-term loans – QDII: participation of Mainland residents in off-shore securities – Currency trading market – CDR: for trading securities listed in off-shore markets in the Mainland 8 8 stock markets using RMB

Capital Account Opening: by Currency, Capital Flow Direction, and Types of Instrument Table 1. Progress of China's Capital Account Opening: Classification by Currency, Capital Flow Direction, and Types of Transaction Instruments Foreigners as investors-asset holders Foreigners as borrowers-liabilitiy Types of transaction while Chinese as borrowers-liability holders while Chinese as investors- instruments holders asset holders Direct investment Inward FDI Outward FDI with approval 1 12 Stocks-IPO 2 13 B, H, Red, ADR Stocks-secondary market 3 14 Bonds-IPO 4 15 China forex bonds Under discussion through QDII Bonds-secondary market 5 16 I===> Dollar Close-ended funds 6 17 China funds (B, H, Red) Open-ended funds 7 18 Long-term loans 8 19 Short-term loans China's external borrowing China's external lending 9 20 Trade credits 10 21 Currency trading Through offshore interbank markets Through offshore interbank markets 11 22 Capital Inflows <===I I===> Capital Outflows Direct investment No allowed No allowed 23 34 RMB <===I Stocks-IPO 24 35 Stocks-secondary market 25 36 Bonds-IPO Through QFII into A shares, RMB bonds, and 26 37 Under discussion through CDR Bonds-secondary market 27 RMB funds 38 Close-ended funds 28 39 Open-ended funds 29 40 Long-term loans 30 41 Short-term loans 31 42 Not allowed Not allowed Trade credits 32 43 Currency trading 33 44 Already allowed Under discussion 9 Not allowed 9

Recent Experiment in Relaxation of 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 10 10

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 11 11

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 12 12

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 13 13

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 14 14

End of Presentation 15 15