China Stocks Rout to Slow Capital-Account Opening, Nomura Says

China at 6% Growth Is Still Massive: McGuire

China’s stocks rout will probably lead to a more gradual easing of its capital controls, hampering the yuan’s bid for reserve-currency status, according to Nomura Holdings Inc.

The slide has wiped out some $3.2 trillion of market value and will likely make policy makers more hesitant about widening foreigners’ access for fear of exacerbating volatility, said Zhao Yang, the bank’s chief China economist. A slower opening up of the capital account would in turn lessen the chance of the yuan being added to the International Monetary Fund’s Special Drawing Rights at a review this year, he added.

The Shanghai Composite Index of shares has tumbled 29 percent from its peak in June and government efforts to stem the slide, including stock purchases by state-run financial firms and a halt to initial public offerings, have yet to restore confidence. Foreigners’ sales of mainland shares through a Shanghai-Hong Kong exchange link climbed to an all-time high on Monday.

“Such large volatility may make people think China’s capital markets aren’t mature enough or experienced enough to guard against risks,” Zhao said from Hong Kong. “It’s not that China will stop easing capital controls, but the steps will be weaker than their original design or our original expectations, which naturally means it’ll be harder to meet the IMF’s standards.”

The yuan failed to make the cut at the last five-yearly review for SDR inclusion in 2010 as it wasn’t regarded as freely usable. Since that ruling, China has widened the appeal of the currency by expanding access to its domestic capital markets as well as encouraging issuance of yuan-denominated securities beyond its borders.

Investment Quotas

Shanghai’s stock-market swings won’t affect the pace of capital-account liberalization as foreign capital flows contribute little to the high volatility, said Ding Shuang, chief China economist at Standard Chartered Plc in Hong Kong. Global funds own less than 3 percent of shares in mainland China.

“The Chinese government will be cautious and will keep the progress gradual by keeping a quota system,” Ding said.

The two main programs granting foreigners access to onshore securities are known as QFII and RQFII. The government had approved $75.5 billion of QFII quotas and 390.9 billion yuan ($63 billion) of RQFII quotas as of June 29.

— With assistance by Justina Lee, and Tian Chen

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