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Breakingviews – China's financial market door just opens inside



HONGKONG (Reuters Breakingviews) – China's latest financial opening pledge goes in one direction. Governor Yi Gang, on Wednesday, pledged to reduce property barriers for foreign financiers by the end of the year, adding that a trade relationship with London could be opened during the same period. Meanwhile, China's Securities and Exchange Commission quadrupled Hong Kong's daily trading volume and opened the way for foreign funds to buy more Mainland shares. In line with China's longstanding practice, the reforms will allow more money to flow from abroad to China, but not the other way around.

Investors look at an electronic board with stock market information in a brokerage in Shanghai, China, March 7, 2016. REUTERS / Aly Song / File Photo TPX PICTURES OF THE DAY – S1AETJYOONAA

The latest concessions appear to be easing trade tension with the U.S. In his speech on Tuesday, President Xi Jinping made conciliatory gestures towards US President Donald Trump, which included repeating promises that made access easier for foreign banks, brokers, funds, and insurers. Skeptics suspected that Xi's promise to implement the changes "as soon as possible" meant further delays. Yi's willingness to commit to a schedule has partially addressed these concerns.

Meanwhile, the China Securities Regulatory Commission raised the stock trading quotas for programs linking the Shanghai and Shenzhen exchanges to Hong Kong at $ 8.3 billion a day. This move will make it easier for MSCI's emerging markets index funds to add 230 high-capitalization portfolios of onshore stocks to their portfolios. A similar trade link with London could facilitate further influx of European funds into Chinese equities and bonds.

Both steps, however, allow China's capital controls. While foreign institutions are allowed to own more of their domestic joint ventures, they will continue to be largely prohibited from offering offshore assets to Chinese investors. Meanwhile, the Stock Connect systems are designed to prevent capital outflows: Chinese investors can buy Hong Kong shares, but the money is converted back into yuan when sold. In addition, even the current quotas are largely untapped. For example, on Wednesday foreign investors used only 248 million yuan from the 13 billion yuan available to buy shares in Shanghai. China may open its financial market door wider than before, but it will only open inward.

Breakingviews

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