Investor Survey Shows Rift in Expectations of Chinese Reform

New research shows significant differences between onshore and offshore investors in their expectations of the pace and direction of financial reform in China.
By Janet Du Chenne(59204)
New research shows significant differences between onshore and offshore investors in their expectations of the pace and direction of financial reform in China.

The research, carried out by the Economist Intelligence Unit on behalf of State Street, is based on a survey of 200 institutional investors, 100 headquartered in mainland China and 100 outside it.

The survey found that an optimistic 62% of institutional investors within China think the Renminbi will eventually surpass the US dollar as the top international reserve currency, compared to only 43% outside China. However, the views are even more varied than this suggests: one in five (21%) of onshore investors do not believe that China will ever fully open its capital account, compared to only two percent of offshore investors who are that pessimistic.

Two thirds of all respondents expect China to complete its financial liberalization within ten years, with a majority expecting major reforms within five.

When asked why the Chinese authorities might be reluctant to open their financial system, 70% 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%) of offshore investors expect China to privatize its banking system within three years, compared to only 19% 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.

Despite seeing more political barriers to reform, Chinese institutional investors are more optimistic about the benefits to the economy and the Renminbi’s future role in international currency markets, according to the survey. 30% of onshore investors see the Renminbi becoming one of the top two traded currencies in world by 2020, compared to no offshore investors holding that belief. 41% of offshore investors believe that financial liberalization will lead to a slowdown in China’s economy compared to 27% of onshore investors.

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