China ready with ‘precautionary measures’ to stop foreign traders causing market volatility, regulator says

Cissy Zhou
·4-min read

China will suspend the ability of foreign investors to trade if they cause serious market volatility through massive capital flows in a short period of time, a senior Chinese regulatory official has said.

“Many people are asking whether foreign ownership will affect the stability of our stock market,” said Fang Xinghai, vice-chairman of the China Securities Regulatory Commission, at the Boao Forum for Asia on Monday.

“What if massive amounts of foreign capital come in and go out? I can tell you that we will take precautionary measures.”

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Fang cited preventive measures available under the Stock Connect scheme, an initiative launched in 2014 that allows international investors to directly trade mainland stocks via the Hong Kong exchange.

Fang Xinghai, vice-chairman of the China Securities Regulatory Commission, says regulators are wary about the potential for market disruption by foreign hedge funds. Photo: Simon Song
Fang Xinghai, vice-chairman of the China Securities Regulatory Commission, says regulators are wary about the potential for market disruption by foreign hedge funds. Photo: Simon Song

“We had a provision when we designed the Stock Connect that if a foreign investor comes in and causes significant volatility in the stock market, we can temporarily stop it from trading,” he said.

Stock Connect has a daily quota restricting the maximum net value of cross-boundary trading flows, with daily “northbound” flows into China limited to 52 billion yuan (US$7.9 billion) and “southbound” flows to Hong Kong capped at 42 billion yuan.

Besides Stock Connect, foreigners can also invest in China A-shares via the Qualified Foreign Institutional Investor and RMB Qualified Foreign Institutional Investor programmes.

Fang’s comments come as foreign investors have increased their purchases of Chinese stocks, encouraged by liberalised rules last year that gave more leeway to overseas funds to repatriate their dividends and capital gains from the world’s second-largest stock market.

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As US interest rates hover at close to zero – and are unlikely to reverse before 2023 – mutual funds, asset management firms like BlackRock and hedge funds like Ray Dalio’s Bridgewater Associates are pouring their investments into China in search of greater returns in equities, debt and real estate.

Following the easing of rules last year, a survey by Standard Chartered released last month showed 59 per cent of respondents would increase their allocations of Chinese assets in the coming 12 months.

Foreign investors bought a net 16.3 billion yuan worth of Chinese A-shares via Stock Connect on Monday, the second highest net purchases this year, after having bought a net 24.7 billion yuan last week, exceeding the 18.7 billion for the month of March as a whole, according to the official Securities Daily.

Driven by declining short-term interest rates and upbeat corporate earnings, the A-share market is expected to “continue to rebound”, said Southwestern Securities in a note.

China’s yuan internationalisation goal ‘is not to replace US dollar’, top banking official insists

But if capital was to start flowing out on a massive scale, there is a risk the Chinese currency would depreciate and trigger further capital outflows. This happened on a modest scale in February and March, with the yuan’s exchange rate against the US dollar dropping more than 1 per cent as a result.

Last month, FTSE Russell, the global index, data and analytics provider, added China A-Shares to the FTSE MPF Index Series, the core equity benchmarks used by the Mandatory Provident Fund industry. China’s domestic equities had already joined MSCI’s benchmark indexes in 2017.

At the end of last month, foreigners owned 5 per cent of Chinese A-shares, still a “relatively low” level, said Fang.

“With more foreign capital coming in recent years, our stock market has been running much smoother, as foreign capital is playing a more important role in market pricing … We will continue to create conditions to lure more foreign investments,” said Fang.

Once massive volatility is caused by some investors, their trading will be suspended to prevent further volatility

Fang Xinghai

Chinese authorities have a “clear view” about the priorities of foreign investors and are not worried about individual investors, whose proportion of overall stock ownership is very small and will not affect the financial stability, Fang said.

The country also welcomes foreign mutual funds, pension funds and insurance companies, which have the highest proportion of A-shares among foreign investors.

But Chinese regulators are wary about the potential for market disruption by foreign hedge funds and so their operations will be watched closely, said Fang.

“Once massive volatility is caused by some investors, their trading will be suspended to prevent further volatility,” he said.

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