Mar 26, 2018 04:57 PM

Q&A: How to Make China’s Capital Markets More Competitive

Mark Austen, chief executive officer of the Asia Securities Industry & Financial Markets Association (ASIFMA). Photo: ASIFMA
Mark Austen, chief executive officer of the Asia Securities Industry & Financial Markets Association (ASIFMA). Photo: ASIFMA

China has made further commitments to speed up the reform and opening-up of its capital markets, but despite high-profile moves, there is still a long path ahead.

Last year, China committed to lifting ownership caps on some foreign financial institutions, expanded trading on its Bond Connect program, and won the addition of 5% of A-shares into the MSCI Emerging Markets Index.

China’s capital markets are getting much bigger and much deeper, said Mark Austen, CEO of the Asia Securities Industry & Financial Markets Association (ASIFMA), an independent trade association. But for foreign firms, a wide range of hurdles remain to entering the market. For example, there is an assumption that once the ownership cap limit is lifted for foreign financial firms, then they will also receive the appropriate licenses to carry out activities such as trading or underwriting. Austen’s group tends to see this as a two-step process. The first part is lifting the ownership caps and the second is enabling these firms to get licenses in a fair and transparent way.

In a conversation with Caixin, Austen offered recommendations for how China could make its capital markets more open and efficient.

Caixin: Industry sources have told Caixin that while the new policies scrap ownership restrictions on foreign firms, removal of “implicit barriers” to ensure fairness is equally important. Can you speak on some of the hidden barriers you have seen?

Mark Austen: In the fixed income market, for example, companies have to go through the National Association of Financial Market Institutional Investors (NAFMII) to get an underwriting license. As part of the process, NAFMII asks the market what they think of a particular firm’s ability to underwrite. Not surprisingly, when you run a process where you ask competitors whether they think a firm is able to compete with you, they will tend to answer “no” because they don’t want additional competition.

In addition, the requirement for capital for these firms to get underwriting licenses is very high in China. Most firms don’t want to deploy their capital this way, because they are simply not getting enough return on their investment.

Local financial institutions also have preexisting relationships with investors and potential issuers that are very difficult to replicate for a foreign entity.

The inclusion of A-shares in MSCI’s widely traded benchmark indices is a milestone in China’s financial market. However, only 5% of the market capitalization of the entire A-share market was added to the MSCI Emerging Market Index. How can the portion of shares be increased?

Whether or not China can have more shares included in the MSCI indices will make a big difference in bringing in more “sticky” money to its equity market. Of course, it would be too disruptive to go from 0% to 100% in one go with a market the size of China, so it would have to be step-by-step.

Major steps have been taken to reform trading suspension policies, but even more tightening is needed. It is far too easy for Chinese firms to suspend their shares from trading, which disrupts what the indices actually track.

Stock borrowing is an innovation that needs to happen in the marketplace so people can short the market. Currently, if you think a company is overvalued, the only way to bet against it is to bet against the whole market, and that is not conducive to the stability and health of the market.

We have learned that New York Stock Exchange-listed Alibaba and Nasdaq-listed may be able to issue and trade China Depository Receipts (CDRs) on domestic markets as early as June. What is your view on the market impact of CDRs?

Depository receipts are important because they give investors access to markets which they may otherwise not have access to. The ironic thing in China is that in most cases, investors are getting access to domestic firms that have been listed offshore.

These companies are well-known and well-understood by domestic participants. From a risk management point of view, Chinese regulators are going to be much less concerned about these types of companies compared to foreign firms. It is a good first step, but ultimately, we hope to see CDRs expanded to other companies that may want to have access to Chinese market participants.

China has divided regulation over the interbank and exchange bond markets, what are some of the challenges this poses for investors?

In most other developed markets, there is a unified set of regulations to avoid arbitrage and to ensure liquidity is not being split across different markets.

We understand there is renewed interest between the People’s Bank of China and the China Securities Regulatory Commission (CSRC) on how to integrate the interbank and the exchange markets or to potentially move to one market over time. This would be in the strong interest of developing a much more liquid market.

One of the challenges in China, now the third largest bond market in the world, is that trading in the secondary market is very poor. There are a host of reasons for this including the splitting of the interbank and exchange markets, low liquidity in the repurchase market to short bonds, as well as inability to hedge risks in any significant way.

The market for bond futures contracts, for example, is not very liquid in China. The main reason is that banks are not allowed to participate directly in this market, which is run by the CSRC. Only securities brokers can trade in this market, but because they do not own the underlying instruments, they rarely do so. Banks, which own the underlying instruments, can trade through securities brokers, but the process is expensive.

What are your thoughts on recent regulatory overhauls in the financial sector announced during the “Two Sessions”?

The turf battles between different agencies have held back reforms in China in recent years.

If you look at the reforms that happened in the last year or two, they tended to be reforms that have been top-down — for example the Bond Connect — or ones where a single agency has taken the lead. Reforms where multiple agencies have worked together are the ones that have tended to get stuck.

From recent trends such as the merger between the banking and the insurance regulators, as well as the formation of the Financial Stability and Development Commission, we see there is renewed vigor to cut through the turf wars and force cooperation.

Contact reporter Liu Xiao (

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