Beijing moves to cement influence over world’s financial markets

The impetus behind China’s significant determination to open its economy 40 years ago was the desire to entice foreign direct investment. 

Strong inflows followed and helped reconstruct the Chinese economy. But these are now being transcended by a newer font of capital that is flooding into the country’s financial markets. 

The transformation in focus from direct investment into industries towards portfolio flows into stocks and bonds reveals much about how China is advancing and how it is exercising greater sway over the world’s financial system. 

Its domestic stock and bond markets – which rank as the worlds second and third largest, respectively have long been insulated from the outside world because of China’s strict capital controls. 

But this year much has evolved. Foreign asset managers, sovereign wealth funds and central banks have strengthened their total holdings of Chinese domestic stocks and bonds dramatically. 

For the first time, such inflows are running at about the same average monthly level as foreign direct investment, which amounted to $91.8bn in the first nine months of the year. 

There are several reasons for the transformation. One is that by opening investments in renminbi to foreigners, China aims to push for the international usage of the currency so it can cut its dependence on the US dollar.

In the chain reaction of the financial crisis in 2009, Beijing recognized the exorbitant privilege that the US derives by having the world’s reserve currency. And determined to buttress the international presence of its own.

With Chinese bonds now set to be included to international indices that act as benchmarks for big institutional investors, meaning asset managers have limited choice but to expand their exposure in China.