Current views on China’s financial liberalization highlight wide variances between onshore and offshore investors, according to a research by the Economist Intelligence Unit (EIU) commissioned by State Street Corporation.
Investor perspectives on financial liberalization are crucial input to China’s economic rotation policy, given the undeniable importance of China’s role in the global economy.
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The report, "Renminbi Rising – Onshore and Offshore Perspectives on Chinese Financial Liberalisation", is based on a survey of 200 institutional investors, 100 headquartered in mainland China and 100 outside it, and shows striking differences between the two groups in their expectations of the pace and direction of financial reform in China.
The survey found that an optimistic 62% of institutional investors within China think the renminbi will eventually surpass the US dollar as the top international reserve currency, compared to only 43% outside China.
However, the views are even more varied than this suggests: one in five (21%) of onshore investors do not believe that China will ever fully open its capital account, compared to only two percent of offshore investors who are that pessimistic.
Two thirds of all respondents expect China to complete its financial liberalization within ten years, with a majority expecting major reforms within five.
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By GlobalDataWhen asked why the Chinese authorities might be reluctant to open their financial system, 70% of onshore investors cited government finances as the most likely obstacle. They also see reforms in this area more urgent and less likely to happen in the medium term than their offshore counterparts.
Nearly half (47%) of offshore investors expect China to privatize its banking system within three years, compared to only 19% of onshore investors, who, although they think it will happen, place it as the lowest priority reform for China. Offshore investors also expect faster reforms opening up the financial sector to foreign markets and competition from foreign banks.
Sau Kwan, managing director of State Street Global Markets and Global Services business in China said: "While there are some interesting variances in optimism and expectations between onshore and offshore investors, it remains clear that there are opportunities for investors to take advantage of the opening up of China’s financial markets. With local branches in all of the offshore renminbi markets, State Street is looking to help our clients benefit from the investment opportunities presented by the growth of the Chinese currency in world markets."
Despite seeing more political barriers to reform, Chinese institutional investors are more optimistic about the benefits to the economy and the renminbi’s future role in international currency markets, according to the survey.
Thirty percent of onshore investors see the renminbi becoming one of the top two traded currencies in world by 2020, compared to no offshore investors holding that belief. Forty-one percent of offshore investors believe that financial liberalization will lead to a slowdown in China’s economy compared to 27% of onshore investors.
Although a larger percentage of foreign respondents say that they expect liberalization to be positive for the Chinese economy (48%), this reflects a substantial amount of scepticism about the ability of the Chinese financial sector to compete on an open market.
Jeremy Armitage, senior managing director and Asian head of sales and trading and research for State Street Global Markets said, "The convertibility of the currency, marketization of interest rates and increased cross-border investor activity offers tremendous scope for activity in the China market. State Street is already working closely with our clients to ensure that they are prepared for this transition in China’s financial markets structure."
Earlier this year, State Street opened an office in Shanghai to service its alternative investment solutions clients and business development initiatives in China. In addition, State Street opened its technology centre in Hangzhou China in 2008, its Beijing branch in 2011, and State Street Global Advisors announced a joint venture with Zhongrong International Trust Co. Ltd, last year.
