China's Financial Liberalisation Chances: Survey Shows Big Opinion Differences

Tom Burroughes

27 February 2014

There are “striking” differences between how onshore and offshore investors regard the prospects for liberalisation to China’s financial system, including the management of its Renminbi currency regime, according to research from the Economist Intelligence Unit.

The EIU report, which was commissioned by US-listed , was based on a survey of 200 institutional investors, with 100 of them headquartered in China and the other 100 headquartered outside the world’s second largest economy.

The survey, entitled Renminbi Rising – Onshore and Offshore Perspectives on Chinese Financial Liberalisation, found that an optimistic 62 per cent of institutional investors within China think the currency will eventually surpass the US dollar as the top international reserve currency, compared to only 43 per cent outside China holding that view.

However, the views are even more varied than this suggests: one in five (21 per cent) of onshore investors do not believe that China will ever fully open its capital account, compared to only two per cent of offshore investors who are that pessimistic, the report said.

The significance of the findings is that with so many contrasting views about the pace and likelihood of reforms to a country still run by a centralised state under Communist control, there remains considerable uncertainty. The Chinese economy grew rapidly in the past decade, although has started to decelerate to a still-high rate of around 7 per cent; concerns have recently built about the state of the financial system, in particular, China’s “shadow banking” system.

Among other details, the report said that two-thirds of respondents expect China to complete its financial liberalization within ten years, with a majority expecting major reforms within five years.

When asked why the Chinese authorities might be reluctant to open their financial system, 70 per cent of onshore investors cited government finances as the most likely obstacle. They also see reforms in this area more urgent and less likely to happen in the medium term than their offshore counterparts.

Nearly half (47 per cent) of offshore investors expect China to privatize its banking system within three years, compared to only 19 per cent of onshore investors, who, although they think it will happen, place it as the lowest priority reform for China. Offshore investors also expect faster reforms opening up the financial sector to foreign markets and competition from foreign banks.

Forty-eight per cent of respondents represent firms with global assets under management in excess of $10bn. The report was written by Bradley Gardner and edited by David Line.