China's capital markets
is undergoing an extraordinary period in its economic development
as it moves from a centrally planned economy to the vibrant marketplace
we see today. Much of the reform has been done at a measured pace.
decades of economic growth and the consequent increased financial
requirements of domestic companies have resulted in the need for
more international participation as China moves to create open
and transparent capital markets. Now is the time for China to
allow a more dynamic rate of change.
regulators in the past few years have made encouraging progress
in their efforts to open up the market and make China more competitive
by steadily increasing the quotas for Qualified Foreign Institutional
Investors (QFII); allowing more foreign participation in several
financial services sectors; moving towards a more flexible currency
policy; introducing stock market reforms; and reorganizing domestic
China Securities Regulatory Commission (CSRC) is in the process
of reforming non-tradable shares and this is a priority that is
essential to the further development and improvement of the market.
The regulator also recently proposed allowing companies to offer
stock incentives to bolster corporate profitability and governance.
are all changes in the right direction, but more needs to be done
and needs to be done quickly. It is of the utmost importance for
China to develop a larger domestic institutional investor base
in order to create deeper, more mature equity and fixed-income
markets. At the same time, to fund the expansion of domestic industries
and maintain a healthy pace of economic growth, China needs to
further open up its capital markets to international companies.
This entails allowing foreign companies to take a controlling
stake in domestic financial institutions and gain greater access
to the domestic equity and fixed-income markets.
Merrill Lynch as an example. Merrill Lynch is one of the largest
financial institutions globally with offices in 36 countries and
territories, operating businesses spanning from investment banking
and capital markets to fund management and private banking. In
most developed countries Merrill Lynch is able to have a fully
integrated financial services platform across its many businesses.
In China, Merrill Lynch is currently only allowed to invest directly
in renminbi-denominated shares and financial instruments through
the QFII system. While our quota has recently been raised to US$300
million, it is still small compared to the US$420 billion capitalization
of the market.
Lynch also operates an asset management joint venture with the
Bank of China Group, BOC International Investment Managers. This
is a long-term commitment and the bank has invested a great deal
of resources into the venture, in which it currently holds a 16.5
in 2005, Merrill Lynch signed a memorandum of understanding with
Anhui-based Huaan Securities to establish a securities joint venture.
Merrill Lynch plans to take a 33 percent stake in the company.
Merrill Lynch is eager to build these businesses so it can facilitate
the growing demands of China's companies and individuals, the
New York-based bank needs more latitude to do so. And Merrill
Lynch is not alone most international banks are in a similar situation.
It is difficult for global financial institutions to optimally
leverage their capabilities in China unless they are allowed to
own majority stakes.
Chinese authorities were prepared to allow foreign investment
banks to enter the market at a faster pace, more progress could
be made more rapidly in the securities industry. One main reason
this hasn't happened so far is the concern that foreign firms
will dominate China's domestic securities industry. This isn't
a likely scenario given China's particular culture, knowledge
and language and it should not be the grounds for holding back
greater freedom and access, international companies can bring
much needed funding and expertise to their Chinese counterparts
and the overall capital markets. It will take time for China to
build up the infrastructure of its capital markets and this process
represents an opportunity to reorganize the financial industry,
inject new blood into the stagnant equity market and make China
even more competitive as an economic powerhouse.