By Andrew Lo, Senior Managing Director & Head of Asia Pacific, Invesco
From the launch of Stock and Bond Connect to the opening of its financial sector to more foreign investments, China has rapidly liberalized its capital markets with great results.
Yet, the sheer size of China’s capital markets and the complexity of its financial system make opening and integrating with the rest of the world a hugely challenging task. China has traditionally resorted to controlled experiments – in the form of pilot programmes to mitigate potential shocks and secure flexibility to change course as needed. But they also come at the expense of policy optimality, policy consistency and, in some cases, policy confusion and frustration.
I believe that the Greater Bay Area (GBA) – a plan encompassing Guangdong province in southern China, Hong Kong and Macao – has what it takes to be the sandbox for China’s next stage of market liberalization. The GBA has 71 million people, and a GDP per capita of USD 23,342. We can appreciate the region’s diversity by considering tech hub Shenzhen and Guangdong’s manufacturing prowess.
Connecting with Hong Kong, an established global financial centre, allows the region to immediately tap into its world-class talent pool, sound legal framework and international best practices to help accelerate China’s plans to liberalize its financial markets.
Specifically, I see several areas where the GBA could take the lead to help transform China’s economic future, namely:
- Developing China’s pension system
- Liberalizing cross-border financial products
- Deepening the liquidity pool of offshore renminbi for payments
The region already offers a rich and deep pool of renminbi savings. The planned pension reform will release more retail investors’ savings into the region’s financial markets. Demand for well-designed and globally diversified investment products and services is on the rise. Investment management industry participants in both Shenzhen and Hong Kong could play a critical role.
The natural starting point is to allow GBA residents to invest in a wide range of investment and retirement products in the mainland and/ or Hong Kong. To swiftly address product and service gaps, the authorities could implement easy passporting of investment products (including cross-border products) that are already authorized in the GBA’s constituent jurisdictions.
Capital must be able to flow and convert freely within the GBA. Reinventing the wheel is unnecessary – China has already embarked on several localized schemes to liberalize its currency and markets, so we can start by broadening their scope within the GBA. If oversight of Chinese offshore accounts can be devolved to corporate fiduciaries – starting with the four largest state-owned Chinese banks, for example – I believe that funds can flow more freely within the region.
Lastly, competition must be encouraged to fuel innovations and help lower the cost of products and services to benefit consumers. The authorities in mainland China and Hong Kong could collaborate to level the playing field for existing capital market participants onshore and offshore within the GBA. This would help foster more vibrant and global institutional participation, thereby deepening China’s financial markets to pave the way for greater internationalization of the renminbi.