Abstract:The closed-loop mechanism is a compromise system product - it is a rare breakthrough in a specific environment to retain foreign exchange control and promote cross-border allocation, but under the new needs of Chinese enterprises to carry out the global layout of the first chain and financial institutions to carry out global allocation, it should be considered to gradually open this closed loop.
Venba Shusong
New Issues in Financial Opening-up: Global Asset Allocation
Many entrepreneurs who have made overseas layouts have a view:In the past 40 years, it is optional for enterprises in China to do international allocation and cross-market chain layout. At that time, China was one of the fastest growing economies in the world, and it could develop well by following the general trend of China's market development.
Now, the international economic environment has undergone drastic changes, in order to cope with the impact of this drastic change, Chinese enterprises to carry out cross-market chain and industrial allocation is a must, is to cope with the new international environmental challenges of the survival of the need.
These experiences from enterprises can actually be said to confirm the significant changes in the current international macro pattern from the micro level.
In the past, globalization, integration and integration could be said to have been the keynote on a global scale. Now it can be said that fragmentation, decoupling, and regionalization are the keynotes. At present, in the process of such a partial decoupling, during this period, Chinese enterprises promote the re-layout of the corresponding industrial chain and the first chain, both the active layout of Chinese enterprises, because of the rise in China's labor costs and the objective needs of industrial upgrading, and some Europe, the United States, Japan and South Korea have implemented the so-called "China + 1" strategy, promoting their ** structure from offshore ** to friendly shore and near-shore**. As you can see,The logic behind the decline in the proportion of China's exports to the United States and the increase in exports to Southeast Asia in recent years is the adjustment of the global regional economic and trade pattern driven by this new general trend and the corresponding adjustment of the industrial structure.
At the same time,One of the far-reaching new developments facing China is also the impending deep aging population. The period from 1962 to 1972 was the decade of China's baby boom, with 300 million births. After this decade, these baby boomers have retired one after another, and China has entered a deep aging population in terms of demographic structure. This is not to say that it is terrible, but it needs to be done early in all aspects of the economic and financial system.
In the early stage, France, Japan, and South Korea entered the stage of deep aging, and there was a very important feature in finance: because aging led to a decline in the return of their own financial assets, their financial institutions began to carry out large-scale professional allocation of overseas high-quality assets. During the lost 30 years, the scale of Japan's overseas investment assets was very large. We will compare the difference between GNP (gross national product) and GDP (gross domestic product) in Japan, which is the starting point of Japan's aging population. GNP growth is significantly faster than GDP growth, driven by overseas asset allocation, and it is at this stage that some Japanese companies are transforming into international companies and multinationals.
Combing through this background information is to emphasize one pointTo discuss financial opening-up under the new situation, it is necessary to support China's outstanding enterprises to take the initiative to allocate the industrial chain across the market based on the new environment, and improve their ability to cope with global shocks. At present, financial institutions want to serve the real economy, they must grasp the objective needs of Chinese enterprises to rearrange the industrial chain, and these enterprises now objectively need more cross-border capital free scheduling rights, and carry out cross-border complex mergers and acquisitions, integration, investment, risk management, investment and financing and other multiple needs.
Due to factors such as economic transformation and the difference in interest rate cycles between China and the United States, the return level of domestic assets is slowly declining. Relatively speaking, the demand for seeking to allocate overseas matching financial assets is rising, and from the interrelationship between demographic structure and financial structure and the experience of some countries in coping with aging, it is not possible to consider encouraging these financial institutions to do some global high-quality asset allocation that matches their own risk and return appetite.
From the perspective of international experience, 30 years ago, some of Japan's financial institutions were still intoxicated by the fog that Japan might continue to grow at a high rate, mainly investing in Japanese assets, and then the net interest margin continued to shrink, resulting in operational problems, and they were integrated and acquired and withdrawn from the market. There are also some Japanese financial institutions that have taken the initiative to allocate overseas and maintained relatively stable operating conditions, which has supported these financial institutions through Japan's difficult adjustment for 30 years.
Now that China has announced its desire to join the CPTPP (Trans-Pacific Partnership), China's financial openness is bound to make adaptations, especially to support the facilitation of cross-market investment by enterprises with greater financial openness.
Connectivity should break the closed-loop thinking
China has made great progress in opening up its financial sector to the outside world, and has achieved remarkable results in opening up to the outside world, especially the internationalization of the renminbi and the interconnection between the mainland and Hong Kong.
At present, the mutual access mechanism between Hong Kong, Shenzhen and Shanghai has become a very important platform and channel for China's cross-border capital allocation, and also supports the inclusion of China's financial market in major international indices. This is an important sign. The achievements made in connectivity are enormous, and they are a major achievement in China's financial opening-up, which has had a far-reaching and positive impact on the financial opening-up of both Hong Kong and the mainland. Based on the current international environment and from the perspective of serving China's specific financial needs, the Stock Connect mechanism can further promote development in at least the following aspects.
First, the interconnection has so far adopted a closed-loop mechanism, under which the interconnection is mainly a platform for the investment allocation of assets, rather than a platform for cross-border capital flow and financial market opening.
For example, in Sanya, I used the mainland app to buy Hong Kong's **, and the funds flowed out, and if I sold ** after a period of time, the funds just returned the same way; Foreign investment in China's **, its capital flow is also a closed loop, foreign capital through overseas financial institutions **Shanghai, Shenzhen**, capital inflow, when selling the original way back, it is actually a closed loop.
This is a rare breakthrough under certain conditions, but we cannot take this state as an end state. For example, when the renminbi is to be internationalized, for example, when the US dollar, euro, and yen are outflowed, it is rarely required that the cross-border flow of funds is closed-loop. If the requirement is closed-loop, it will be difficult to make the current progress and breakthrough in its internationalization.
It is more worth reminding,It is necessary to prevent this closed-loop mechanism from being fixed in the design of financial reform and opening up, which is often prone to path dependence. For example, the Cross-boundary Wealth Management Connect is actually trying to build a closed-loop mechanism, and other commodity market openings seem to be considering imitating the closed-loop mechanism.
However, objectively speaking, the closed-loop mechanism is more of a product of a compromise, which is a product of a compromise system that wants to retain foreign exchange controls and promote cross-border allocation.
2024 is the 10th anniversary of the launch of the Shanghai-Hong Kong Stock Connect, can we consider setting a standard, whether investors who have invested for a certain period of time and have accumulated rich experience in overseas investment can leave a certain proportion of funds overseas for asset allocation, so as to cooperate with the internationalization of RMB.
A reminder,You can't keep copying the closed-loop mechanism as a perfect template, it's always a closed-loop one by oneJust like when we go out from the current hotel, if the route out is a closed overpass, walk over to that side to have a look, and can't go to other places, we can only come back again, this kind of closed overpass is actually very limited.
Considering our financial openness under the new situation, this closed-loop mechanism may also be difficult to support the allocation needs of Chinese enterprises to do overseas chain allocation and the internationalization of financial institutions.
Second, the current opening of interconnection is mainly concentrated in the secondary market, and has never touched the primary market. From the perspective of business operation process, it is nothing more than the gap between the moment of issuance and the time after the issuance, but in fact, it contains the policy guidance of whether the registration system based on market pricing can be truly implemented. Through the connection of the primary market, we can better support the enterprises of these entities, and it can also enable the mainland to transfer part of the issuance pressure to overseas when it is facing market pressure for issuance and listing.
Therefore, from the perspective of financial opening-up, it is also possible to consider limiting the current interconnection to the secondary market and extending it to the primary market. The legal positioning of the primary market is not much different from that of the secondary market, for example, doing a legal technical treatment can provide a support from the primary market for many Chinese companies to list overseas, and also give mainland investors a more choice of new shares.
Third, the vast majority of listed companies currently covered by the Stock Connect are still mainly mainland enterprises. Therefore, in terms of the large capital flow of companies and investors covered by the Stock Connect, it is mainly a matching channel between mainland issuers and overseas funds, but in order to truly promote financial opening-up, there should be another end of financial activities, that is, the matching between international high-quality issuers and mainland investors.
How can we increase the target of international high-quality companies and invest in mainland investors in the next step? Either it will launch the international version of the mainland, or increase the proportion of outstanding international companies listed in Hong Kong and include them in the Hong Kong Stock Connect.
There is no foreign exchange control in the Hong Kong market and there is very little intervention, and the vast majority of the income of its listed companies comes from the mainland. For example, there is a very clear correlation between the exchange rate and the rise and fall of Hong Kong**, as soon as the RMB exchange rate depreciates, the RMB income received by listed companies from the mainland will decrease in Hong Kong dollars, and the decrease will affect its valuation. Therefore, Hong Kong's capital market can be said to be very market-oriented at present, and sometimes it has become a barometer of the mainland's economic fluctuations.
In contrast, the United States** seems to be strong many of the time. In many cases, this is not just because of how strong the U.S. economy is, but because excellent companies from all over the world continue to list in the U.S., so that the rise and fall of the U.S. capital market index is not only a reflection of the economy of the United States alone, but also partly reflects the operating conditions of some of the world's outstanding companies.
Therefore, the next step for the Hong Kong market to develop more deeply, of course, to continue to give full play to the huge advantages of relying on the motherland, but also to continue to face the world, attract high-quality companies from all over the world to list, and put these international companies in Hong Kong into the Hong Kong Stock Connect to allow more mainland investors to choose, so that mainland investors have more choices, which should also be another trend and direction of internationalization.
Fourth, the products covered by the current interconnection are still very single, and the scale is not small, but in fact, it is still very single. Another point is that at present, in the Shanghai-Hong Kong Stock Connect and Shenzhen-Hong Kong Stock Connect transactions, for example, the current overseas denominated transactions are only in Hong Kong dollars.
In 2023, the Hong Kong Stock Exchange will try to have 24 listed companies apply for the dual currency of Hong Kong dollar and RMB**, although the current liquidity improvement of trading is limited, because the amount of overseas RMB is limited, the next step is not to put it in the Hong Kong Stock Connect to allow mainland investors to trade directly in RMB. If trading is active, continuing to issue additional shares in RMB and promoting more companies to list in Hong Kong and denominated in RMB may be a very important new start for RMB internationalization.
2024 is the 10th anniversary of the launch of the Hong Kong Stock Connect, and we are in a position to systematically sort out this, and from the perspective of changes in the new situation and the new needs of serving China's real economy, we will explore the reforms that may still need to be done in the future, and there are still many opening-ups that need to be promoted.
A review of the rankings of exchange fundraising in global financial centers over the years shows that the global financial system presents some new characteristics that deserve attention.
First of all,Many capital markets are actually purely closed regional markets, and although they rank high in terms of fundraising amounts, in fact, their investors and fundraisers are local investors and do not have international influence. If we mainly consider the fundraising of exchanges in the world's open international financial centers, we can see a very clear trend, which is to concentrate on the head.
And then there'sExchanges in the United States are concentrated, followed closely by Hong Kong. Hong Kong has more than 60 companies listed in a turbulent environment in 2023, and although it has declined, it is already good compared to other international exchanges. For example, compared with the London market, London's income from IPOs (initial public offerings) accounts for only 4% of total revenue, and there is almost no fundraising function; There are even fewer new listings and fundraising in the Singapore market.
The United States is actively opening up its market to attract outstanding companies from all over the world to go public, and the strength of the US dollar is still maintained. The main reason is that there is a huge economy - China, and Chinese enterprises that are laying out industrial chains across markets in Southeast Asia, so that the financial ties between Southeast Asia and Hong Kong are also rapidly increasing. This is because the industrial relocation of Chinese enterprises has brought about new overseas financing needs, which are not easy for mainland exchanges to meet under the conditions of foreign exchange control.
In fact, because of the recession of the European economy and the Brexit of the United Kingdom, London is basically limited in its financing function, and in some years it can be almost ignored. Many large British and European companies are still going public in the United States.
If these trends are considered in conjunction with the next step of connectivity, the fund-raising function of Hong Kong, China in the future is first of all to serve mainland enterprises to go global, and at the same time, it is also necessary to actively establish an open, diversified and international fund-raising market to maintain international competitiveness, so as to maintain a certain degree of fund-raising function and market activity.
(The author is Managing Director and Chief China Economist of HKEX and Chief Economist of China Banking Association; This article was edited by Caijing reporter Kang Kai based on his speech at the Sanya Caijing International Forum in December 2023, and is abridged; Editor: Yuan Man).