An Inflection Point in Chinese Capital Markets JC de Swaan Caijing Magazine July 3rd, 2009

The institutional development of Chinese capital markets has lagged – while a growing body of academic literature has demonstrated the positive linkages between the development of capital markets and economic growth, China has managed to grow at a breath-taking 10% CAGR over the last 30 years despite lacking commensurately developed capital markets. Several announcements in the past months suggest a potential shift – China may be finally paving the way to modernize and open up its capital markets, a process that has been long in the making. This time however, a date has been set with the announced objective of turning Shanghai into a global financial hub by 2020. In order to achieve that goal, several seminal changes will need to take place. Foremost among these will be convertibility of the Rmb and opening up of equity capital markets to foreign investors beyond the tightly controlled QFII program in existence. A set of domestic-oriented reforms, including a broadening of financial service offerings, will also be critical to the transformation. While the US-borne financial crisis has triggered much soul-searching in developed economies and a vigorous debate on reforms of financial institutions, it has had none of that effect in China. If anything, it appears to have accelerated plans to reform Chinese capital markets. At a high level, this can be seen as part of a broader effort to assert China’s naturally evolving role as a major economic power. Closer inspection suggests that Beijing’s support of that ambitious goal may owe as much to concerns that a modernized domestic financial system may be increasingly critical to mitigate the impact of structurally slower export growth going forward as to rising confidence in its financial sector reformers, whose oft criticized