A Step Forward in Opening up China’s Stock Market

On July 8， the China Securities Regulatory Commission （CSRC） announced that the State Council had， in principle， approved increased access for foreign investors to the Chinese mainland stock market by allowing foreign individuals to trade yuan-denominated A-shares.

“The move is significant in increasing the financing sources for the stock market， optimizing the structure and lifting the level of opening up and internationalization of the capital market，” the CSRC said in a statement.

The easing of A-share investment restrictions is part of Chinas efforts to further open up its financial sector to foreign investment and gear up the real economy. The new policys beneficiaries mainly consist of foreign nationals working in the Chinese mainland and foreigners working overseas for A-share listed companies and participating in equity incentive programs.

A cooperation mechanism between securities regulators in foreign investors home countries and the CSRC is a prerequisite for transactions. To date， 62 countries and regions have signed 68 cooperation agreements with the CSRC.

The measure is also aimed at attracting foreign talent. As noted by the CSRC， Chinese securities and futures companies have entered a new era of development featuring growing cross-border businesses.

In such situations， allowing these firms to provide equity incentive programs for foreign employees and encouraging them to invest in the Chinese stock market are conducive to bringing in international financial professionals and advanced foreign market regulation approaches， which is essential for the integration of Chinese securities and futures sectors and their foreign counterparts， and creating worldclass securities and futures companies in China.

Moreover， the growing number of foreign investors in A-shares indicates that the increase in foreign capital inflow in the shape of asset allocation can be maintained.

Channels for foreign investment in the A-share market have been expand- ing in recent years， including the Shanghai and Shenzhen-Hong Kong stock connect schemes and the Qualified Foreign Institutional Investors program. On June 1， global index compiler MSCI included more than 200 large-cap A-shares into its bencmark indexes， a landmark event for the opening up of Chinas capital market and one which could bring in approximately 50 billion yuan （$7.5 billion） in incremental capital.

MSCI Chairman and CEO Henry Fernandez said that he will attach great importance to evaluating international investors feedback after A-shares join the MSCI indexes. There are two aspects to this evaluation， the first of which is whether the stock trading process is smooth， which determines investor confidence. The other is whether investors can adapt to the distinct A-share market， which has a daily trading quota for non-Chinese mainland investors， while investment through the Shanghai- and ShenzhenHong Kong stock connect schemes does not cover the whole market and the money is not allowed to participate in initial public offerings.

Despite the recent slump of Chinese stocks， there is a clear trend of accelerated foreign capital flow into the A-share market. Until June 15， net money inflows through the Shanghai- and Shenzhen-Hong Kong stock connect schemes amounted to 164 billion yuan （$24.6 billion）， an increase of 95 percent on last years 84 billion yuan （$12.6 billion）.

Increased access for foreign investors could also contribute to improving the A-share market and promoting a concept of value investing. Many Chinese stock investors are accustomed to a deep-rooted notion of speculation， but now China expects more foreigners to invest， rather than speculate， in its stock market.