PBoC chief pledges to keep opening up China’s financial sector

China will also continue market-based reforms of yuan exchange rates

yi-gang-deputy-governor-pboc-director-safe
Yi Gang: “Most of the measures have materialised”

People’s Bank of China governor Yi Gang has pledged to continue to open up China’s financial sector, admitting there are still “a few measures yet to materialise” despite the central bank’s promise to implement them by the end of 2018.

“Most of the measures have materialised,” Yi said at the China Development Forum in Beijing on March 24. “The very few measures that are yet to materialise have reached the final stage of law amendment, and applications from foreign investors have been received and are being processed.”

Yi’s pledge came one year after Chinese president Xi Jinping promised to further open up the financial services sector. “We will implement specific measures sooner rather than later,” Xi said in April 2018, during a keynote speech at Boao Forum, known as ‘China’s Davos’.

Yi said the central bank’s priority this year is to create a supportive environment to provide hedging tools such as derivatives for investors to effectively manage risks.

“Once foreign investors are investing in the onshore market, they will find a lack of derivatives, hedging tools and other financial products,” warned Yi.

Specific measures

Following Xi’s keynote speech last April, the PBoC released 11 specific measures designed to open up China’s financial sector, as foreign companies and investors still faced many constraints.

The measures include the removal of foreign ownership caps for banks, allowing foreign investors to own a controlling stake in securities and derivatives companies. The measures came during trade disputes between the US and China, as Beijing tries to paint itself as an open economy and a key backer of free trade and globalisation.

Since then, some foreign financial institutions have gained improved market access. For example, UBS has increased its shareholding in UBS Securities (China) from 25% to 51%, a controlling stake for the Swiss company.

Overseas investment in China’s bond market increased by nearly 600 billion yuan ($89 billion) in 2018
Yi Gang, People’s Bank of China

Similarly, Allianz has been approved to establish the first insurance company controlled by foreign capital in China. S&P has received a credit-rating licence in China, while American Express became the first foreign company be allowed to start preparations for providing electronic payment services in China.

China’s financial market is becoming more attractive to foreign investors, thanks to increased openness and stronger competitiveness, Yi said, citing the inclusion of China’s A shares in the benchmark MSCI index in June 2018.

“Overseas investment in China’s bond market increased by nearly 600 billion yuan ($89 billion) in 2018, and the outstanding investment by overseas bond investors has reached 1.8 trillion yuan,” said the PBoC governor.

Following an early move by MSCI, Bloomberg has confirmed it will include Chinese bonds in its Bloomberg Barclays Global Aggregate Index, starting in April.

“Chinese and foreign-funded institutions should be treated equally, in a way that is more transparent and consistent with international practice,” Yi concluded.

Reforming yuan exchange rates

Yi said China will continue market-based reforms of yuan exchange rates, while improving the managed floating exchange rate regime, based on market supply and demand.

China established the “managed floating exchange rate” system in 1994, ending decades of the single-rate foreign exchange mechanism. In 2005, China began to manage yuan exchange rates based on a basket of currencies instead of just the US dollar.

On behalf of the central bank, the China Foreign Exchange Trade System publishes the central parity rates of the yuan against major currencies before the opening of the market each business day. The PBoC uses the central parity rates to adjust renminbi exchange rates.

Since 1995, the yuan has appreciated about 30% against a basket of currencies, and it has risen more than 20% against the US dollar in the past two decades.

“The People’s Bank has largely phased out regular interventions in the foreign exchange market and [the] renminbi has become more flexible,” said Yi. “Market participants are able to adapt to this increased flexibility.”

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