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China wants to open up its financial markets to foreigners — but it’s a long road ahead

  • Chinese and foreign financial institutions are betting on more business opportunities in one industry in which Beijing is still eager to crack open: finance.
  • Some of the latest developments have come in the futures market, where U.S. and Chinese businesses are collaborating more and where China could develop more global influence.
  • However, Li-Gang Liu, managing director and Chief China Economist, Citigroup, pointed out that capital controls mean China's role in global price setting will still be limited.

A worker pours molten iron into a mold at a mill manufacturing marine engine components in Huaian, Jiangsu province, China February 11, 2019.Reuters

BEIJING — Financial institutions are betting on more business opportunities in China's finance industry, which Beijing is eager to crack open — even if analysts say major changes are a long way off.

Regardless of the coronavirus pandemic or geopolitical tensions, Chinese authorities have stuck to plans to increase the ability of foreigners to participate in the local financial market.

Beijing would like more foreign capital to come into the country and boost international use of its currency, known as the yuan or renminbi. As China is set to grow into the world's largest economy, foreign investors are keen to capture a share of that growth.

Some of the most recent developments in the industry are in the Chinese futures market. Investors can trade futures contracts as a way to bet on upcoming price changes, or guard against losses.

"As China introduces more international (futures) contracts such as the recent copper contract from (the Shanghai International Energy Exchange), we have been getting a vast amount of interest from our existing clients, especially from Europe some from the U.S. as well," said Rick Chang, general manager for Greater China at U.S.-based financial data and trading software company, CQG.

The interest in copper means the commodity "has a huge potential of being a key benchmark to the market globally and regionally," Chang said.

Greater influence in global prices

In November, copper became the latest Chinese futures contract available for trading by overseas investors via the Shanghai International Energy Exchange, or INE.

The Chinese crude oil contract that launched less than three years ago is now the third-most traded in the world for the commodity, albeit far below that of international benchmark Brent crude, and U.S. crude oil futures, WTI.

"We've seen an increasing number of overseas investors trading at INE covering over 20 countries and regions from five continents around the world," the Shanghai International Energy Exchange said in a statement to CNBC.

In a sign of how much INE would like to attract foreign investors, the exchange launched online courses in English last year about the Chinese futures market.

The potential for pricing power feeds into a longer-term goal of increasing global influence.

As long as China has capital controls and foreign participation is not large enough, China's … global influence in price setting will still be limited.Li-Gang LiuChief China economist, Citigroup

While China is the world's largest consumer of many major commodities, its closed financial markets have meant that prices for products ranging from iron ore to copper are set by futures contracts traded in Chicago and London.

In another step toward making the local financial market more accessible to foreigners, authorities added futures and other products in November to an investment channel that allows overseas capital into China. Known as the Qualified Foreign Institutional Investor (QFII) program, the channel previously limited foreigners to mainland-traded stocks.

Chinese firms go abroad

Reflecting growing international interest in Chinese futures, CQG strengthened its collaboration with Hangzhou-based brokerage Nanhua Futures in August through a global strategic partnership.

The deal will allow overseas access to the six international futures products currently listed on three Chinese exchanges: copper, crude oil, rubber, low-sulfur fuel oil, iron ore and purified terephthalic acid (PTA), which is used in polyesters.

Nanhua Futures has seen very rapid growth in foreigners' trading volume, Li Lingfang, head of the international department at the brokerage told CNBC in December. In the past 12 months, growth more than doubled, she said.

Nanhua has operations in Hong Kong, Singapore, the U.K. and the U.S. The company said the top four locations for overseas clients come from Switzerland, the Netherlands and Israel, Hong Kong.

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