China Volatility Could Derail Market Liberalization

With the latest mechanisms failing to stem a sharp market sell off, China may call a halt to policies intended to open up markets to foreign investors.

"The latest circuit breakers have not had the intended effect, but rather made things worse," said Martin Lockstrom, Chairman and Chief Investment Officer of QuantCore, a systematic trading shop based in Shanghai, speaking to Finance Magnates. "In other words, there are currently no signs of reverting to the previous liberalization path."

The Shanghai Composite index has fallen 17.5% since 22nd December 2015, which is not quite bear market territory, noted brokerage firm SP Angel, while this week started off with a sell off in equity markets as both the Shanghai and Shenzhen indices fell 5.3% and 6.6%, respectively. The correction has rattled global markets.

Chinese officials had been showing willingness to continue opening up mainland markets, through domestic partnerships for commodities trading, for example, and via the Hong Kong-Shanghai Stock Connect link.

I don’t expect any foreign institutional investors to make any inroads in the foreseeable future

But as markets begin another week with a sharp correction, how these policies and mechanisms continue to unfold is in question.

So far, scrutiny has sharpened on the financial markets watchdog, China Securities Regulatory Commission (CSRC), and its chairman, Xiao Gang, according to CNBC. Gang was already facing internal criticism from the ruling Communist Party for his handling of the stock market crash in July and August last year, according to sources cited by CNBC, and since the most recent policy reversal, online media have given him the moniker 'Mr Circuit Breaker”.

“The root cause seems to be too much involvement of political forces, and even disagreement between different government bodies," Lockstrom added.

"Considering the current situation, I don’t expect any foreign institutional investors to make any inroads in the foreseeable future."

Along with opening up markets for trading, China has quota-based programs allowing foreign institutions to invest in A-share markets via USD or other foreign currency (QFII), or through offshore RMB (RQFII). Participants include most of the world's largest banks such as Goldman Sachs, BNY Mellon, BNP Paribas, and Credit Suisse, among others.