China, a global economic powerhouse, has recently unveiled significant reforms in its financial regulatory landscape, setting the stage for a massive expansion in its government bond market. The establishment of the Central Financial Commission, Central Financial Work Commission, and the State Financial Supervision and Administration signals a strategic shift in aligning financial oversight under unified leadership. This transformation, marked by the elevation of the Financial Stability and Development Committee to the Central Financial Commission, with the Prime Minister as its director, reflects China’s ambitious plan to assert itself as a financial leader. (Source)
Two pivotal events in January 2024, largely overlooked by the international financial press, carry profound strategic implications.
A session on high-quality financial development attended by provincial and ministerial-level leading officials, was opened at the Party School of the Communist Party of China (CPC) Central Committee (the National Academy of Governance) on the morning of January 16th. Xi Jinping, the General Secretary of the CPC Central Committee and Chinese President, emphasized the unique trajectory of China’s financial developmentin a speech. He highlighted that this path aligns with the trajectory of modern finance but also incorporates distinctive features tailored to China’s specific national conditions. Xi acknowledged the divergence from Western financial development models while underscoring the need for confidence and continued exploration in the financial sector to broaden this unique trajectory.
In a press conference on January 25th, the State Council unveiled over 50 measures for financial opening-up, with Vice MD of National Administration of Financial Regulation, Mr. Xiao, YQ, making a groundbreaking announcement. Foreign investors are now permitted to own 100% of banks and insurance companies in China, marking a significant departure from previous restrictions. Barriers hindering foreign equity participation, acquisitions, and capital increases in financial institutions have been removed. As a result, a myriad of institutions, ranging from wholly foreign-owned insurance companies to foreign-controlled wealth management entities, as well as wholly foreign-owned currency brokerage and insurance asset management firms, have swiftly become active participants in China’s financial landscape. This deregulation marks a pivotal moment in fostering collaboration and diversity within China’s financial markets, complementing its broader initiative to become a financial powerhouse. (Source)
The strategic linchpin of China’s financial ambitions is the over USD 34 trillion government bond market, mirroring the practices of the United States. In anticipating the unfolding financial landscape, a pivotal move on the horizon involves the expansion of the government bond market in China for foreign investors. With a burgeoning Chinese real economy poised to rival its American counterpart, astute investors are eyeing the prospect of diversifying their portfolios into RMB assets.
As of April 2023, foreign investors had acquired a substantial USD 7.4 trillion worth of American government bonds, constituting approximately 27% of the entire US GDP, according to data from the U.S. Treasury. (Source) Applying this rationale to the Chinese economic landscape, a similar foreign ownership target of 27% of GDP for Chinese government bonds could be envisaged. With China’s GDP reaching USD 17.5 trillion in 2023, foreign investors could potentially show interest in acquiring up to USD 4.7 trillion in Chinese government bonds, equivalent to RMB 33.8 trillion, assuming attractive interest rates prevail.
Over three years ago, I advocated for the issuance of RMB government bonds for international investors. This is yielding tangible results: Foreign investors have already seized the opportunity, with holdings of RMB 3.9 trillion in bonds recorded at the end of January 2024, marking a monthly increase of RMB 202.8 billion. This marks the fifth consecutive month of foreign institutions augmenting their holdings of RMB bonds. Impressively, overseas institutions closed January with RMB 647.8 billion worth of bonds under the custody of the Shanghai Clearing House, reflecting a monthly surge of RMB 118.8 billion. (Source)
As this monumental growth potential of around RMB 30 trillion (calculated as 33.8-3.9) and USD 4.6 trillion in the bond market beckons, the question arises: who stands to be the primary beneficiaries? European financial entities appear to be more poised for success than their American counterparts.
China, in a move signaling increased openness, has granted licenses to six foreign banks, including Credit Agricole, HSBC, and Standard Chartered, allowing them to serve as lead underwriters for debt issues in the burgeoning renminbi-denominated onshore debt market. Notably, these institutions received “type A” licenses, granting them the authority to lead the underwriting of debt issues for both domestic and foreign borrowers. This comes as a significant expansion beyond the previous exclusive licenses held by Deutsche Bank and BNP Paribas. Furthermore, Beijing has extended the privilege to JPMorgan, Mizuho, and MUFG to act as lead underwriters for “Panda bonds,” debt issues by foreign borrowers. (Source)
The stage is set for Wall Street institutions and their decision-makers to actively engage with this monumental growth opportunity. Rather than succumbing to apprehension amid escalating political tensions instigated by China hawks in Washington, now is the time for proactive involvement and strategic positioning.