Financial market opening-up to intensify starting from Q2

Overseas bodies buy $9.5b of domestic onshore bonds during first 3 months

China's financial market opening-up is on a steady track, with domestic bond and stock markets set to be further incorporated into global indexes from the second quarter, the State Administration of Foreign Exchange said on Thursday.

"The gradual, steady agenda of international mainstream indexes including the domestic markets should exert related influence in a smooth manner," Wang Chunying, spokeswoman of the foreign exchange regulator, said at a news conference.

The Chinese securities markets will continue to see an orderly net inflow of foreign capital for some while, Wang said, considering the index inclusions and the current relatively low foreign holdings.

On April 1, Bloomberg Barclays Global Aggregate Index started to include yuan-denominated government and policy bank bonds. Over the next 19 months, the global fixed-income investment benchmark would increase Chinese bonds' weighting evenly each month.

With global portfolio managers using the index to guide asset allocation, the move may usher in foreign capital of more than $100 billion from April to November 2020, analysts said.

Meanwhile, global index compiler MSCI Inc announced it would increase the weighting of China's A shares in a phased-in manner in May, August and November, potentially bringing in another nearly $70 billion in overseas capital.

During the first quarter, overseas institutions purchased a net $9.5 billion of domestic onshore bonds as well as a net $19.4 billion of mainland-listed shares, data from SAFE showed.

Liu Chunsheng, an associate professor at the Central University of Finance and Economics in Beijing, said as China's financial market opening-up deepens, the importance of preventing risks from two-way cross-border capital flow fluctuations has increased.

"Given the large scale of China's economy and foreign exchange reserves, it is unlikely for the country to be significantly hurt by risks associated with cross-border capital flows, but it is still necessary to push ahead reforms to better leverage the market's role in managing risks," Liu said.

Foreign exchange reserves have risen for five consecutive months to $3.0988 trillion as of the end of March, official data showed.

Wang said the country's foreign exchange market is able to "absorb" the impact of accelerating securities market opening-up, citing China's healthy economic fundamentals and the breadth and depth of the market.

Looking ahead, the country's continuous endeavors to optimize the renminbi exchange rate formation mechanism, as well as the foreign exchange market reforms, will help further stabilize the market, Wang said.

Specifically, SAFE will step up efforts to support securities firms and fund companies to participate in the foreign exchange market, and launch more types of options on the market this year, Wang said.

Also, qualified foreign institutional investor systems will be reformed, featuring streamlined access management and an expanded scope of investment, she said.

Since the beginning of the year, the foreign exchange market remained stable with positive changes, according to SAFE. During the first quarter, Chinese lenders recorded net foreign exchange sales of $9.1 billion, down 50 percent from the deficit during the same period last year.

Based on preliminary estimates, the country's current account recorded a surplus over the first quarter, with the surplus in goods having expanded year-on-year and the deficit in services narrowing, Wang said.

The country is expected to maintain a basically balanced current account and the overall stability of cross-border capital flows over the year, Wang said.