Investors seeking to gain exposure to China have utilized exchange traded funds (ETFs), but now the country is beginning to open up its capital markets to foreign investors, with caution. The new Chinese policy may provide better efficiency in the markets.
China’s economy has seen runaway growth in the last year, which is why the government took a few steps to keep things in check. One such move is raising the minimum reserve requirement put in place by its banks, guiding credit to sidestep inflation and asset bubbles, reports Bloomberg.
Other steps taken may boost investment into the country, though. The China Securities Regulatory Commission is approving stock index futures, and it may take three months to complete the paperwork for index futures, write Tal Barak Harif and Jeff Kearns for BusinessWeek. The Chinese government is also going to allow margin trading and short selling. [China’s economy at a crossroads.]
By opening up the capital markets, China will soon have more people participating in the marketplace, which will help provide greater efficiency. Currently, China prohibits overseas investors from trading yuan-denominated stocks and bonds on the mainland, with the exception of qualified foreign institutional investor programs.
Richard C. Kang, the chief investment officer at Emerging Global Advisors LLC, cautions that the more open Chinese market may lead to “too much growth too quickly.” He also notes that “if this leads to over-speculation, what happens is that there will be more short- term thinking in the market, and could lead to more speculators than hedgers.” [China goes nuclear.]