China changes limits to foreign direct investment

Bold moves, difficult economic times . . .

Last week, China removed one of the last vestiges of a closed capital economy: limits and quotas over foreign direct investment (FDI) in China’s equity markets. The limits were imposed in 2002 when China opened its domestic equity market but wanted to do so in a slow, controlled fashion. These latest reforms, however, were rushed through to help reverse the country’s economic slowdown and to signal to the rest of the world China’s commitment to further opening up its economy amidst the trade war with the U.S.

Liberalizing capital markets to capture more FDI . . .

The bold move accomplishes two things. First, it empowers Chinese stock markets not only in mainland China but also in Hong Kong. The Qualified Foreign Institutional Investors (QFII), and the Renminbi Qualified Foreign Institutional Investor (RQFII) schemes were already largely redundant after a 2014 program called Connect allowed foreign investors to trade stocks, bonds, and other securities freely across different stock markets – such as Hong Kong, Shenzhen, and Shanghai – without restrictions. Meanwhile, the Hong Kong Stock Exchange has been attempting to buy the London Stock Exchange, a move seen as an attempt to expand its global influence to attract more investors. The second bid, however, was turned down last Friday.

Just in time for the new round of trade talks . . .

Second, the liberalization of capital and financial is yet another nod to the U.S. government that China is ready and willing to reach an agreement, as the two countries aim to begin another negotiation round early October. China has also lifted sanctions on two key U.S. exports – soybeans and pork – to ease tensions and pressure on U.S. farmers. If the round goes well, it can set an important precedent that Canada could use as a bargaining tool with its own trade quarrels with China with agricultural goods such as meat and canola, either bilaterally or at the WTO.

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