Opinion: Turning Foreign Investment Into ‘Patient Capital’

By Caixin

After a 19-year hiatus, a new policy has emerged for foreign investors regarding strategic investments in Chinese mainland stocks. Among other things, the revised Measures for the Administration of Strategic Investments in Listed Companies by Foreign Investors lower the threshold for investing. The goal is to broaden the ways for foreign capital to enter securities market, leveraging the potential of strategic investment to attract capital and encouraging long-term, value investment. This sends a clear signal from the Chinese government about its commitment to high-level opening-up and attracting foreign capital. Encouraging more foreign capital to invest long term and become “patient capital” will improve the quality of foreign capital utilization and facilitate industrial upgrading and the healthy development of China’s capital market.

In 2005, five government departments, including the Ministry of Commerce, issued the measures shortly after China got into the World Trade Organization. Since the measures took effect, foreign investors made strategic investments in more than 600 listed companies. In recent years, attracting more high-quality foreign investment has become an intrinsic need for the further development and strengthening of China’s capital markets. This year’s Decision of the Central Committee of the Communist Party of China on Further Comprehensive Deepening Reform and Promoting Chinese-style Modernization proposes to “orderly expand the opening of our country’s commodity, service, capital and labor markets” and “enhance the convenience of foreign investment in equity and venture investments in China.” Additionally, with the introduction or revision of laws such as the Foreign Investment Law, Securities Law and Company Law, there have been significant adjustments in the regulatory system, necessitating revisions to the measures to align with new circumstances. Lowering the threshold for foreign investors to strategically invest in mainland stocks is the next logical step in this context.

Specifically, the measures lower the threshold for foreign strategic investment in mainland stocks in five areas. They allow foreign individuals to make strategic investments. They relax asset requirements for foreign investors. They introduce tender offers as a way to make strategic investments. They allow the use of overseas unlisted company shares as payment consideration for strategic investments via targeted issuance and tender offers. And lastly, they moderately reducing shareholding ratio requirements and lock-up periods. These “technical” improvements address some concerns of foreign investors. Of course, many factors determine whether foreign capital flows into mainland stocks. Investment thresholds and lock-up periods are only two of them. It is closely related to domestic economic vitality, the investment value of the securities market, and whether the regulatory system is sound. Ultimately, whether foreign capital is “patient” depends on investors’ confidence and expectations about the domestic stock market and the Chinese economy as a whole.

There is significant room to guide medium- and long-term funds into the market. The decision calls for “developing patient capital” and “supporting long-term funds entering the market.” It requires the removal of obstacles to social security, insurance and financial management funds entering the market. Moreover, foreign capital, especially strategic investment, can become long-term stock investments, rather than just short-term speculative “hot money.” According to the measures, strategic investment refers to the acquisition and long-term holdings of mainland stocks by foreign investors through directed new share issuance, agreement transfer, tender offers and other methods. By definition, this type of strategic investment inherently possesses the characteristics of long-term capital, with the potential to become patient capital.

In recent years, China has continuously expanded high-level institutional openness to address foreign investors’ concerns and demands. Notable highlights are the optimization of the capital market’s cross-border interconnection mechanisms and the continuous improvements that have made it more convenient for foreign investors to put money into mainland shares. Recently, a spokesperson for the China Securities Regulatory Commission stated that the country will continue to promote institutional openness across markets, institutions and products, as well as deepen cross-border market connectivity, broaden overseas listing channels, and encourage and support more foreign institutions to invest and operate in China. Foreign institutions and individuals made up only 4.1% of the investors in mainland stocks in the second quarter of this year. Even though they make up only small share of the total, foreign investors remain an important participant in China’s securities market, with strategic investment playing a unique role in enhancing the dynamism of the domestic capital market.

This necessitates a correct understanding and perspective about foreign capital, fostering a favorable environment for foreign institutions in terms of public opinion. It is undeniable that all capital seeks profit, and foreign investment is no exception. As China’s economy grows, its industrial structure gets upgraded, and technological and management levels improve, the share of foreign capital in the Chinese economy will naturally decline. However, this does not mean that China no longer needs it. Today, foreign investment is indispensable for China’s drive toward high-quality economic development, the construction of an innovative nation, and thwarting attempts at “decoupling.” The healthy development of China’s capital market similarly relies on foreign capital, particularly strategic investments.

China has no shortage of exemplary cases of introducing strategic investments. At the turn of the century, the four major state-owned commercial banks faced “technical bankruptcy.” Starting at the end of 2003, the shareholding reform of state-owned commercial banks began. This led to a “phoenix-like rebirth” of Chinese banking. In this process, foreign financial institutions, as strategic investors, played a significant role in reshaping corporate governance in the domestic banking sector and improving its management at the operational level. Although times have changed, strategic investments by foreign investors can still play an indispensable role. Encouraging more foreign capital to serve as long-term funds and “patient capital” in China requires sustained economic recovery and robust market-based legal frameworks to ensure an environment that welcomes both local and international capital alike.

caixinglobal.com is the English-language online news portal of Chinese financial and business news media group Caixin. Global Neighbours is authorized to reprint this article.

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