Emerging Markets : Financial Sector Reforms Promised


China will further open its financial sector following the second Strategic Economic Dialogue in Washington, DC, in May. As a result of the meeting, China will ease restrictions on foreign securities firms, allow foreign banks to issue domestic credit and debit cards, let foreign insurance companies set up domestic subsidiaries, and increase the investment limit for qualified foreign institutional investors (QFII) from $10 billion to $30 billion. The two countries will also cooperate on a variety of environmental and economic policy measures.

While it promises to ease restrictions on foreign investors, China is tightening the screws on domestic investors. The ministry of finance tripled the tax on stock market transactions in late May, triggering a 13% fall in the Shanghai Composite index. Stock prices rose by 130% last year and have increased by 40% so far this year, despite the recent losses. The rapid growth has fueled fears of speculation, and the government has responded with a variety of economic cooling measures. The late May losses did not influence foreign markets, however, unlike a similar drop in domestic stock prices in February that dragged down markets worldwide.

In another sign of its increasing openness, the Chinese government has announced that it will buy a $3 billion stake in Blackstone Group, a global private equity firm. China will form a new government agency, the State Management Company, to more efficiently invest the country’s $1.2 trillion in foreign exchange reserves. These foreign exchange reserves have in the past been predominantly invested in US treasury bills. The State Management Company will control the $3 billion non-voting Blackstone stake.

China will revamp its food and drug regulatory system, a state-run website announced. The government plans to increase inspections and impose stricter controls to stop farmers and manufacturers using unsafe additives and pesticides. The government will also implement a new food and drug recall system, according to state-run media reports, in response to growing fears in overseas markets about the safety of Chinese food and drug products.

Thomas Clouse