China’s Reforms: Will They Work? by Hayden Briscoe, AllianceBernstein
The internationalization of China’s currency is proceeding hand in hand with the liberalization of the country’s capital markets. If China can surmount its short-term challenges, the impact of these reforms on global economies and markets should be profound.
Of all China’s reforms, the one most likely to reverberate around the world is the liberalization of the country’s capital markets. In just a few years, it should lead to China’s bond and equity markets being incorporated into global indices, forcing a massive reweighting of portfolios as benchmark-observant investors reallocate assets to China just to stay market neutral.
To gauge the potential impact, it helps to review China’s progress on this reform to date.
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China Has Opened the Door
The country began liberalizing its capital markets in 2002, when it launched the Qualified Foreign Institutional Investor (QFII) scheme, which allowed foreign investors to trade yuan renminbi (RMB)–denominated Class A Shares and government and corporate bonds on the Shanghai and Shenzen stock markets. Since then, the scheme has been steadily expanded. In 2011, the government established the Renminbi Qualified Foreign Institutional Investor (RQFII) program, to a