China will step up domestic capital market reforms, potentially mobilising massive private savings and encouraging inward portfolio flows to cushion the risk of capital outflows sparked partly by a slowdown in the world’s second-largest economy.
Monetary authorities will focus this year on capital market reforms, stock and bond market developments, see the first batch of five private banks set up under a pilot scheme, and expand the qualified foreign institutional investor (QFII) scheme to aid inward portfolio flows, financial regulators said at a press conference yesterday on the sidelines of the National People’s Congress.
“It’s urgently needed to increase the investment return of domestic savers,” Yuan Gangming, a researcher with the Chinese Academy of Social Sciences, said. “Otherwise capital outflow will become more evident and evolve into a big concern for Chinese authorities.”
Xiao Gang, chairman of the China Securities Regulatory Commission, said this year’s focus will be developing a multilevel stock market, deepening reform of the bond market, growing the futures and derivative markets, and boosting the private equity market.
“We will further expand investment under QFII and [renminbi qualified foreign institutional investor] schemes,” Xiao said. “There is great potential to expand QFII investment, and we are working on tax policies (to help the expansion).”
The QFII and RQFII programmes, introduced in 2002 and 2011 respectively, were aimed at giving overseas investors, including those in Hong Kong, opportunities to buy securities traded on the mainland markets through a quota-based system.
The investment quota under the QFII scheme will jump to 10 per cent of the mainland market’s capitalisation in five years from 1.5 per cent now, says ChinaQFII, a Hong Kong firm that helps foreigners invest on the mainland.
In a bid to encourage competition to pave the way for deposit rate liberalisation, Chinese leaders endorsed a pilot scheme last year to allow private companies to set up their own banks.
Shang Fulin, chairman of the China Banking Regulatory Commission, said the first five such banks will be set up in Tianjin, Shanghai, Zhejiang and Guangdong, and the banks will decide on the timeframe to start operations.
Shang did not identify the companies which will take part in the scheme.
But the People’s Daily quoted Shang yesterday as saying that Alibaba Group Holding and Tencent Holdings are among at least 10 companies allowed to set up banks. The others are Wanxiang Group, JuneYao Group, Fosun Group and Chint Electric, the newspaper said. Each lender in the trial needs at least two founders.
Xinhua said in an English report that Alibaba and Tencent will take part, but its Chinese language report did not name any companies.
The capital market has been plagued by chronic problems such as insider trading and flawed system designs which resulted in the inefficient use of domestic savings.
The Shanghai Composite Index was among the worst performers in global financial markets as it shed 6.7 per cent last year.
The 105 trillion yuan (HK$134 trillion) in bank deposits at the end of February provided a measly 0.35 per cent benchmark interest rate for depositors. That was in stark contrast with money market funds sold online by internet companies which offer annualised returns of about 6 per cent because they are not subject to rate caps on deposits ordered by the central bank.
Regulators will also allow the participation of private investors to break the dominance by state-owned banks and support financing of small private firms to rectify imbalances in the mainland’s financial system.
The inefficient use of funds has caused bad loans to balloon since the 2008-09 global financial meltdown and aggravated overcapacity in several industries.