Opinion: China's financial markets enter global arena

Against the backdrop of economic uncertainty, foreign stock exchanges provide opportunities for Chinese companies to monetize their value abroad. Stable legal frameworks, mature investor bases and international recognition, are all significant considerations for Chinese companies looking to raise capital offshore. This appetite for diversity and overseas revenue among modern Chinese firms has created room for financial and legal innovation—for instance, we recently developed a new structure that allows Chinese-incorporated companies to monetize their holdings at premium rates on the Hong Kong Stock Exchange.

At the same time, steps are being taken to further the globalization of China's financial markets. The continual expansion of the Qualified Foreign Institutional Investor (QFII) programme and the recent relaxation of foreign exchange regulations applicable to QFIIs, as evident in the Provisions on Foreign Exchange Control in Connection with Securities Investments in China by Qualified Foreign Institutional Investors, provide more flexibility to overseas investors interested in the Chinese capital markets and will attract more investments through the QFII channel.

Longer-term, reforms to Chinese capital markets and financial infrastructure will continue down the path of opening up to the outside world: inclusion of the renminbi in the IMF's Special Drawing Rights basket, the potential inclusion of A-shares in the MSCI Emerging Markets Index and the proposed change from an approval-based to a registration-based system for IPOs–the list goes on.

The Chinese financial markets are no longer an adjunct to the international arena. In many ways, this is the story of globalization, whereby the world's markets become increasingly inter-dependent. This presents more opportunities than risks, as it ultimately requires greater cooperation among governments to foster stability.

Annabella Fu van Bijnen, Linklaters, Beijing

Investors worldwide are pinning their bets on China's economic direction and capital outflows amid a fluctuating currency and volatile stock market. Simultaneously, firms and individuals are undertaking different approaches to diversify their investments. China is aware of its growing importance in the global markets, so talk of major capital controls is unlikely to materialize. Instead, what is more likely is a series of micro reforms to encourage inflows and curb outflows. As the government continues to control most economic levers, it is able to activate targeted measures to restrict capital leaving its borders. The real test is, however, whether these smaller changes are sufficient to steer the country in the right direction and have the desired stabilizing effect.

At an individual level, the Chinese are investing in foreign property, but also purchasing life insurance products and other assets as a way of hedging their bets. There are clearly those who are concerned about keeping their assets in China. Certain programs, which enable the Chinese to invest offshore, have reportedly been suspended to curb the flight of capital, and payment channels, such as the use of Unionpay for insurance transactions, are being tightened.

Capital is leaving also at the company level, but more strategically. For instance, state-owned enterprises are looking to invest in foreign markets to expand their marketplace and revenue streams. This trend is manifesting through a surge in outbound investment activity. This is overall a positive development for China and demonstrates the growing maturity of its economy. The Chinese government has major policies in place to sustain outbound investment, with One Belt One Road being its landmark development plan. The impact of these policies are real and, such as in the case of the Belt and Road initiative, they are creating substantial economic opportunities. There is an increased focus among domestic companies in pursuing offshore acquisitions to diversify investment portfolios while the currency is still relatively strong.

Outbound M&A activity is expected to increase as companies look to foreign markets to make strategic offshore investments. Cash-rich firms are keenly aware of the need to ensure their businesses have both domestic and offshore income sources. Given the relatively tight foreign exchange controls, very limited avenues remain available for international investors to withdraw capital from China, so flight will not be a huge issue in this regard.

Against the backdrop of economic uncertainty, foreign stock exchanges provide opportunities for Chinese companies to monetize their value abroad. Stable legal frameworks, mature investor bases and international recognition, are all significant considerations for Chinese companies looking to raise capital offshore. This appetite for diversity and overseas revenue among modern Chinese firms has created room for financial and legal innovation—for instance, we recently developed a new structure that allows Chinese-incorporated companies to monetize their holdings at premium rates on the Hong Kong Stock Exchange.

At the same time, steps are being taken to further the globalization of China's financial markets. The continual expansion of the Qualified Foreign Institutional Investor (QFII) programme and the recent relaxation of foreign exchange regulations applicable to QFIIs, as evident in the Provisions on Foreign Exchange Control in Connection with Securities Investments in China by Qualified Foreign Institutional Investors, provide more flexibility to overseas investors interested in the Chinese capital markets and will attract more investments through the QFII channel.

Longer-term, reforms to Chinese capital markets and financial infrastructure will continue down the path of opening up to the outside world: inclusion of the renminbi in the IMF's Special Drawing Rights basket, the potential inclusion of A-shares in the MSCI Emerging Markets Index and the proposed change from an approval-based to a registration-based system for IPOs–the list goes on.

The Chinese financial markets are no longer an adjunct to the international arena. In many ways, this is the story of globalization, whereby the world's markets become increasingly inter-dependent. This presents more opportunities than risks, as it ultimately requires greater cooperation among governments to foster stability.

Annabella Fu van Bijnen, Linklaters, Beijing