Last week, MSCI, the world’s top equity indexing provider, announced that it was raising the Chinese share of its emerging markets index. This was just the latest of a string of recent measures to open up China’s financial markets to foreign portfolio capital. But while this may boost domestic liquidity and prices, it does so at the cost of undermining banking stability and increasing Chinese susceptibility to financial disruptions from abroad.
The most important of these measures was announced in September, when the People’s Bank of China declared that it was dispensing with the various restrictions that had limited the ability of foreign institutional investors to invest in mainland stocks and bonds. According to an article the next day in the People’s Daily, “international investors will be allowed unfettered access to the world’s second-largest capital market”.
Earlier Euroclear, the global securities clearinghouse, had announced a memorandum of understanding with its Chinese counterpart to simplify the process by which foreign investors can gain access to China’s interbank market. The proposal will also allow foreign investors to pledge renminbi-denominated bonds held in China as collateral for exposure elsewhere.