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Another small step in China’s move to financial liberalisation

China has taken further steps in financial liberalisation.

China has taken further steps in financial liberalisation.

Now, UK and mainland Chinese firms can list on each other’s stock market and investors can trade these stocks in the form of depository receipts.  Furthermore, Chinese and Japanese investors can invest in each other’s markets via locally listed ETF products. China-Japan ETF Connectivity scheme

The China-bound (or Eastbound) ETFs are established by Chinese asset managers and track Japan’s stock indices. They are listed on the Shanghai Stock Exchange. The Japan-bound (or Westbound) ETFs are established by Japanese asset managers and track China’s A-share indices.  They are listed on the Tokyo Stock Exchange.  A total of eight ETFs have been launched, four in Shanghai and four in Tokyo.

Shanghai-London Stock Connect Under this new programme certain companies listed either on the Shanghai Stock Exchange or the London Stock Exchange will be able to issue depositary receipts, (which represent ownership of their shares), on the other bourse. Investors can buy these receipts to gain exposure to companies listed elsewhere. Companies can sell them to diversify their sources of funding. UK-listed firms would issue Chinese depositary receipts (CDRs) in Shanghai, but, slightly confusingly, Chinese-listed firms would issue “global depositary receipts” (GDRs) in London. While the names are different, they amount to the same thing. The programe would allow investors on the Chinese mainland to trade the stock of a foreign company in their own markets for the first time. The more international London Stock Exchange already offers investors dozens of GDRs from many different countries Remember, there are two main ways for overseas investors to access mainland Chinese stock markets

In China, they are launched under the Qualified Domestic Institutional Investor (QDII), Qualified Foreign Institutional Investor (QFII) and Renminbi Qualified Foreign Institutional Investor (RQFII) programmes.

Readers will remember that the two main ways for overseas investors to invest in the Chinese mainland’s stock markets are;
  • Through the QFII and RQFII programmes, launched in 2002 and 2011 respectively.
  • The stock connect programmes - The Shanghai-Hong Kong Stock Connect, launched in 2014 and the Shenzhen-Hong Kong Stock Connect, launched in 2016.
A further small step toward liberalisation of China's financial markets

These new schemes mark another, albeit small, step in China’s incremental approach to open its capital account by establishing connectivity between the capital markets in China and the rest of the world (the UK and Japan in these cases).

At this stage these schemes should not be seen as game changers. Their initial importance is primarily symbolic but they do form part of China's move to liberalise and open its capital markets.

Such schemes can be further replicated between China and other major financial centres and for bonds and other financial products if opportunities arise with other countries.

For more articles by Chi Lo, click here > For more posts on China and other emerging markets, click here > To read more about the inclusion of Chinese A-shares in equity indices, click here > To discover our funds and select the ones that meet your requirements, click here > Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients. The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Investing in emerging markets, or specialised or restricted sectors is likely to be subject to a higher than average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity, or due to greater sensitivity to changes in market conditions (social, political and economic conditions). Some emerging markets offer less security than the majority of international developed markets. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk.

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