Foreign investors scrutinize China capital markets as opportunities widen, diversify

Global investors in Shanghai are quietly treasure-hunting in China's undervalued capital markets – beginning with the high-yield bonds last year and, more recently, turning their attention to equities.

In November, Citigroup CEO Jane Fraser was among recent visitors to Beijing, Shanghai, Hong Kong and other Chinese cities for a series of high-profile meetings.

She said the US-based investment bank and financial services company is optimistic about China's economy and the outlook for its financial markets.

The group, she added, will "further its participation in the market to help promote US-China economic ties and trade, while safeguarding the healthy development of the global economy."

Other financial institutions, such as Abu Dhabi Investment Authority and a few prominent US universities' endowment funds are expressing similar views, according to Qian Jun, executive dean of the Fudan International School of Finance (FISF).

He told Shanghai Daily, "China's capital markets haven't been as active earlier this year, due to a variety of reasons. But that is clearly changing after a stream of government policies intended to reverse an economic slowdown, including the central bank's monetary stimulus measures unveiled on September 24."

Qian is often a go-to point for foreign investors seeking clarity on China's capital markets.

"Many foreign investors, on recent visits, have told me that their Asia, and in particular, China portfolio, is underweight," he said.

These investors, he noted, have expressed concerns about what they see as increasing risks in the US stock market, citing the "monopolizing" effect of the so-called "Magnificent Seven" – a group of big, influential information and technology stocks that includes Amazon, Apple, Microsoft, Nvidia and Tesla.

Some investors who view those market heavyweights as overvalued and a potential tipping point for a market decline are looking elsewhere for safer and promising returns, especially in fast-growing Asia.

"I will not be surprised if foreign holdings of RMB-denominated assets return to their recent high point of about 4.5 percent of domestic stock markets by next year, and reaching new highs in the bond market as well," Qian added.

What global investors seek in Shanghai is reassurance that the city is still determined to remain China's international financial center, with stable, transparent and predictable policies to further open up market access.

Qian, who holds a PhD in financial economics from the University of Pennsylvania, has led a team of researchers from FISF and just finished a preliminary study of the financial sector for the municipal government's pending 15th Five-Year Plan (2026-30). Specifically, he focused on policies to enhance the city's role as an international financial hub.

"Shanghai is not only an international financial center today, but it is also on the path toward becoming the global center for RMB-denominated financial assets," Qian said.

"That means, the city will continue to offer more varieties of financial products and make it easier for qualified global investors to invest. This is all happening right now."

He added, "This is and will remain a fast-growing and globally attractive market. What investors need to worry about is not policy direction, but competition from local counterparts in order to obtain 'alpha' (excess returns) from their investments."

In an exclusive interview, Shanghai Daily (SD) picked Qian's brain for more insights and future investment opportunities.

SD: Foreign investors often complain that China's financial system isn't opening up fast enough for them. What's your view on that?

Qian: First of all, I know as a matter of fact that it is much easier for an American or European bank to open a branch in Shanghai than it is for a Chinese bank to open one in New York or London.

It is true that opening-up progress in China's financial system lags that of its world-leading trade sector. I would say that's for good reasons.

Before the 1997 Asian financial crisis, the "consensus" view, shared by the International Monetary Fund (IMF), was that emerging markets wanting to develop their financial sectors should first open up their capital accounts.

The financial crisis changed that because it was characterized by large inflows of capital (before the crisis) and subsequent large outflows (during the crisis), without any restrictions.

These large capital flows posed risks, even for developed markets like South Korea, whose companies had very high rates of dollar-denominated debts leading up to the crisis.

Nowadays, the IMF regularly advises that some degree of capital control and management is sound policy for emerging markets. That is now the prevailing view.

So China, the largest emerging market in the world, has been and will be careful about opening its capital account as its financial system continues to develop.

That said, China has made a lot of efforts to open up the financial system to international capital and investors in the last 20 years, especially in the last five to 10 years.

And the way it is being done is really rather innovative, with "Chinese wisdom."

SD: What sort of innovations? Will opening-up continue?

Qian: If you think about investment from international institutions into China's capital markets and domestic capital going outbound, the best way to characterize it is through two-way channels.

One such example is the Shanghai-Hong Kong Stock Connect, which began in 2014 and is running very smoothly. That initiative reflected a gradual, steady opening-up process. In the beginning, there were monthly limits and other regulations, and step by step, rules were relaxed.

The southern-bound (from Shanghai to Hong Kong) and northern-bound capital is kept in pools at the Hong Kong and Shanghai stock exchanges, and the money never leaves these pools, essentially eliminating risks caused by sudden, large and uncontrolled capital, as occurred during the 1997-1998 Asian financial crisis.

The average daily trading volume of the Shanghai-Hong Kong Stock Connect and the subsequent Shenzhen-Hong Kong Stock Connect has increased nearly 23-fold in the last 10 years, from about 6 billion yuan (US$828 million) in 2014 to 136 billion yuan in October 2024, accounting for about 8 percent of total trading volume on the Shanghai and Shenzhen exchanges.

Take the registration-based IPO system for domestic companies as another example. It was also not a one-step process, and for a while, market participants were worried it might be taken off the table.

Now, over 1,000 companies have been listed through this Nasdaq-style system, which was first launched in 2019 through the opening of the STAR (Science & Technology Innovation Board) Market in the Shanghai Stock Exchange (SSE). And most of those companies show very good paths for future growth and are attractive to foreign investors.

Yes, the government is further opening up the financial system for sure.

On December 2, new updates of the Administrative Measures for Strategic Investment in Listed Companies by Foreign Investors (外国投资者对上市公司战略投资管理办法) will come into effect, significantly lowering the thresholds and relaxing requirements for foreign strategic investments.

That is just one of the many relaxations underway now with the goal of facilitating foreign investments in China's financial system.

SD: So why do some foreign investors feel China is stagnating?

Qian: For various reasons: the global economic slowdown, policy adjustments and investor confidence, among other factors.

The domestic A-share market hasn't been active in terms of stock trading, equity investment, or IPOs in general. As a result, there isn't much activity for foreign investors either.

But it has never been the case that foreign investors weren't allowed or didn't want to participate in any aforementioned aspect of the markets.

It is also true that for some foreign investors as well as manufacturers, it is more challenging to earn profits here due to a number of factors, including much more competitive domestic counterparts, compared with 10 years ago.

That said, foreign investors are returning to China's financial system, and quickly increase their exposure of Chinese assets of their portfolios. SSE just concluded the very successful 6th Global Investors' Conference. More than 160 institutions, including all the big names in the industry, participated and many expressed long-term optimism in the Chinese market.

Overseas financial institutions are embracing the latest policies lifting restrictions in various financial sectors. This year, HSBC, Standard Chartered and Credit Agricole joined Deutsche Bank and BNP Paribas as foreign banks licensed to be lead underwriters for debt issues by domestic and foreign borrowers. Many others have submitted applications and are in the review process.

That also holds true for wealth management firms, hedge funds and insurance companies, among others. All these foreign institutions are setting up new businesses in Shanghai as rules are further relaxed in areas such as limit for foreign equity ownership and new opportunities emerge.

SD: What advantages does Shanghai have compared with other international finance centers?

Qian: As a global financial center, Shanghai is connected with and supported by the entire Chinese economy, including high-quality manufacturing, efficient and complete supply chains, and the congregation of technology startups, particularly in the adjacent Yangtze River Delta region.

You also have consumer spending driven by the desire to improve quality of life by the Chinese people, especially the Chinese middle class, which is a population over 300 million (and as high as 600 million), larger than the entire US population.

That will continue to drive the real economy, which in turn will benefit the majority of companies listed on SSE.

Meanwhile, those seeking primary investment into "unicorns" will also appreciate Shanghai as an access point to a vast number of Chinese startups.

Shanghai isn't just developing the city as an international financial center, but rather as five centers: an international economic center, an international trade center, an international shipping center, and an international science and technology center.

SD: You said Shanghai is on the path to becoming the global center for yuan-denominated assets. What should investors expect?

Qian: Quite a lot. First of all, further relaxations are surely on the way, especially in the Lingang New Area, which essentially operates on a "white list" system. In May, the city released a "general data" list for firms, including Tesla, in the free trade zone there to make data transfers overseas without a security assessment. That is also the case for financial institutions.

Going forward, Shanghai aims to develop an RMB-to-foreign currency capital pool to simplify the allocation and adjustment of investor reserves in RMB and foreign currencies. It is intended to increase the use of renminbi offshore. Shanghai has important plans to make it easier for qualified financial institutions and manufacturers to issue bonds in RMB and foreign currencies in the free trade zone.

The city is also ready to offer more assets for investors to choose from. One of the most improved performances in RMB-denominated assets lies in commodities – creating Shanghai benchmarks.

Recently, prices of the November futures contract for crude delivery on the Shanghai International Energy Exchange (affiliated with the Shanghai Futures Exchange) soared. The first RMB-denominated crude oil futures contracts were launched on the exchange in March 2018, establishing the Shanghai price as an international benchmark set to compete with the US West Texas Intermediate and London's Brent.

The exchange has grown from ground zero to third in the world in terms of trading volumes in the last five years, and it is ready to lift its game by launching more RMB-denominated products, including liquefied natural gas futures.