China Opens Securities and Investment Truest Markets

China made a big stride toward its goal of ‘opening to capitalism’. The Beijing government announced that it would abolish foreign investment ban in financial markets starting from June 1.

Foreigners will be allowed to invest up to a third of equity in a securities company and up to 33% in an investment trust firm, according to the public announcement released by China Securities Regulatory Commission. This step came after the ban abolition in telecommunications, logistics and insurance and it made China join the borderless international capital markets.

Analysts say there are probably two major reasons behind the recent step. Firstly, China can show the world that it honors the promise with the WTO and secondly, with the influx of the foreign investment, China will be able to obtain advanced know-how, which will result in stimulating its rudimentary stock market.

According to the announcement, foreign investors can participate in Chinese securities or investment trust companies by acquiring shares. Along with this, the foreign-invested securities firms will be allowed to deal with national bonds and corporate bonds as well as shares of Chinese companies.

Boosting stock market is the main purpose

It was the early 1990s when Shenzhen and Shanghai stock exchanges opened. At that time, China introduced stock markets and encouraged its state-owned companies to go listed as a way to reform them. As a result, the number of listed firms in China skyrocketed from only 14 in 1991 to 1,088 in 2000 and the total market capitalization increased from 369.1 billion Yuan in 1994 to 4.8 trillion Yuan in 2000.

However, the Chinese stock markets experienced serious ups and downs in the late 1990s. The stock price manipulation scandals, which offspring of the vested interest involved in, shook the stock market and many individual minority shareholders incurred significant damage, which dealt serious blows to faltering confidence in the stock market. This was one of the reasons that stock market disciple was brought up as agenda in the National People’s Congress held in this March.

Market analysts expect the abolition will contribute to reviving the Chinese stock market. A president of a Chinese securities firm said that this step will upgrade the Chinese stock market to an international level and will speed up the development of the market.

Foreign companies are flocking to China

With the removal of the investment ban, many foreign firms are projected to advance into the Chinese market.

Morgan Stanley began the operation of commission-based stock transactions through a financial company jointly established with China Construction Bank. France and Germany are also in final phase to conclude joint venture contracts with their Chinese counterparts.

Many experts in China forecast that the increasing foreign firms in China will help the Chinese stock market develop faster with advanced know-how and, at the same time, China’s small-and-medium sized securities firms will be driven out of the market in the end.

ljhzip@donga.com