China is set to use the Shanghai free-trade zone as a testing ground to grant Chinese people greater freedom to make overseas investments, according to the most senior official in Shanghai.
“One of our key objectives is allowing qualified individuals within the free trade zone to open capital accounts in a gradual and orderly manner, on condition of good risk control,” said Han Zheng, party secretary of Shanghai and a member of China’s 25-strong politburo, in an interview with the Financial Times.
Mr Han’s comments came on the eve of Monday’s debut of the Shanghai-Hong Kong stock connect. He did not give details on how the new initiative would be rolled out.
According to people close to the relevant central government agencies, the free-trade zone trial of the initiative could start as early as 2015. All moves concerning the free-trade zone are subject to Beijing’s final approval.
The move to ease regulations governing Chinese cross-border capital flows is seen as a substantial step in Shanghai’s drive to become an international financial centre.
If the trial goes ahead it will allow individual Chinese investors much greater freedom to move money overseas and invest in financial assets such as stocks and bonds as well as physical assets such as real estate.
At present, the main channel through which individual Chinese investors access overseas markets is the qualified domestic institutional investor programme. That scheme, launched in 2006, licenses Chinese asset managers to sell mutual funds comprising overseas stocks and bonds to local investors.
China’s foreign exchange regulator had granted in total $87bn to Chinese fund managers under QDII by the end of October.
China’s cabinet also said in May that the government planned to establish a qualified domestic individual investment (QDII2) programme to allow Chinese residents to invest in overseas capital markets. The “capital accounts” planned for the free-trade zone would offer an additional channel beyond these two programmes. 截至10月底，中国外汇监管机构已向中国各基金管理公司批出总共870亿美元的QDII额度。
Wealthy Chinese have become big buyers of overseas real estate. But there is still no officially sanctioned channel to allow Chinese people to convert renminbi to foreign currency for this purpose, leaving many of them to rely on grey-market money changers or fake trade invoicing to move money abroad.
When asked about the prospect of the stock connect between his city and Hong Kong, Mr Han, a former mayor of Shanghai, said he believed it would pave the way for financial innovations but that the top priority was to make it safe.
“What concerns me most is that the stock connect programme be sustainable,” he said. “We must manage well all potential risks because this is an area that we have never touched before.
“Why adopt a quota system? Without quota management, the large-scale capital inflows and outflows can create uncontrollable risks. I believe with the quota system in place we should be able to cover risks that we could think of, including the biggest possible risks. I am confident that the stock connect will at least not encounter disruptive risks.”
Under the current quota system for the stock connect programme, investors in Hong Kong heading north will be able to buy a net total of Rmb13bn ($2.1bn) of Shanghai-listed shares per day. In return, a net Rmb10.5bn can head south to buy Hong Kong shares each day. Both markets are subject to aggregate limits at Rmb300bn and Rmb250bn respectively.
More than 150,000 mainland investors have registered their interest in trading Hong Kong-listed shares with the Shanghai Stock Exchange.
When asked if stock connect would give Shanghai a new advantage in competing with Hong Kong as a financial centre, Mr Han was candid.
“Shanghai still cannot yet compare with Hong Kong in areas such as environment for business development, talent, legal environment and market maturity,” he said. “Frankly speaking, Hong Kong’s market is much more mature than Shanghai’s. We need to learn from Hong Kong.”