Capital mkt institutional opening-up prioritized

Accelerating the institutional opening-up of China's capital market at a high level is the only path toward achieving high-quality development of the capital market. It is necessary to establish the notion that "post-border rules are more important than border opening", benchmark against international high-standard rules, comprehensively identify institutional weaknesses in China's capital market and improve the capital market ecosystem.

In the process of promoting institutional opening-up, strict precautions must be taken against risks such as institutional incompatibility, information leakage, external shocks, malicious attacks and financial sanctions.

The term "institutional opening-up" was first proposed at the Central Economic Work Conference in 2018, which emphasized the need to adapt to new circumstances, grasp new features, and promote a transition from opening-up based on the flow of goods and factors to opening-up centered on rules and institutions. In 2019, the concept was included in the Government Work Report for the first time.

Under the Central Committee of the Communist Party of China's requirement to improve the institutional framework for high-level opening-up, advancing institutional opening-up of the capital market carries significant importance.

In the past, China's capital market opening focused mainly on channel-based and border opening. However, as foreign investors increase their participation in domestic capital markets, institutional differences between China and other markets have become an important factor influencing foreign investors' willingness to allocate assets in renminbi.

Research shows that emerging and developing economies generally face insufficient foreign investment, mainly due to unfavorable government policies and regulations, underdeveloped financial markets, weak regulatory enforcement, poor investor protection and low institutional quality that exacerbates information asymmetry. Therefore, to enhance China's international competitiveness, it is necessary to shift from the traditional model of opening-up toward an institutional opening-up paradigm, improving transparency and predictability to create a favorable environment for international investors.

Traditional opening-up based on goods and factor flows mainly targeted specific markets and entities. Institutional opening-up, in contrast, emphasizes comprehensive and systematic institutional design across major economic sectors. The report to the 20th National Congress of the CPC clearly called for steadily expanding institutional opening-up with regard to rules, regulations, management and standards.

Traditional border opening-up focused on facilitating the cross-border movement of goods, capital, people and technologies. Institutional opening-up, however, places greater emphasis on post-border rules, raising requirements for property rights protection, industry subsidies, environmental standards, labor protections and government procurement. Thus, compared with border opening-up in specific areas — such as pre-establishment national treatment, negative list management and broader scope opening-up — post-border opening-up, which focuses on aligning domestic rules, regulations, management and standards with international norms, carries greater significance.

At the end of October 2023, the Central Financial Work Conference stressed the need to balance "bringing in" and "going global", steadily expanding institutional opening-up in finance. "Bringing in" means adopting international best practices domestically by aligning rules, regulations, management and standards. "Going global" means actively participating in international rule-making, taking the lead in establishing systems in emerging areas, supplementing and refining existing international rules in line with new circumstances, and providing more global public goods.

As an important part of building China's socialist market economy system, institutional opening-up of the capital market will strengthen the decisive role of the market in resource allocation, improve efficiency and support high-quality economic development.

Advancing institutional opening-up will help remove explicit and implicit barriers that hinder the flow of production factors and allocation of financial resources. This will enable the capital market to better perform its functions in price signaling, risk allocation and corporate governance, thereby raising total factor productivity.

At the same time, shifting yuan internationalization from quantitative expansion to qualitative progress will require deeper institutional opening-up of capital markets, stronger foundational systems and regulatory capabilities, and enhanced international competitiveness of capital markets.

Against the backdrop of profound global changes, the April 2025 CPC Politburo meeting emphasized dealing with the uncertainty of drastic changes in the external environment with the certainty of the country's high-quality development. Accelerating institutional opening-up of the capital market therefore has significant practical importance: reducing reliance on overseas financing, lowering risks of currency and maturity mismatches, enhancing the attractiveness of renminbi assets to foreign investors, mitigating risks of financial decoupling and strengthening macroeconomic governance to support expanded financial opening-up.

Institutional opening-up should follow principles of domestic leadership, international orientation, local grounding, market orientation, integrated advancement and security prioritization.

Globally, there are no strict standards or unified jurisdiction over capital market opening-up. Therefore, China should advance institutional opening-up proactively, progressively and controllably, in line with domestic economic development and reform needs. The Central Economic Work Conference held at the end of 2024 emphasized the need to expand both autonomous and unilateral opening-up in an orderly manner, reflecting the proactive nature of China's opening-up strategy under new circumstances.

Since poor institutional quality exacerbates information asymmetry — one of the main reasons for insufficient foreign investment in emerging economies — China must accelerate alignment of domestic capital market rules with high international standards to make foreign investors feel at home.

Market economies evolve endogenously and cannot simply copy foreign systems. While some international standards may represent best practices, they may not suit all countries or periods. Developed economies, as the main providers of current international systems, may design rules to favor their own interests. Thus, institutional opening-up must take local realities into account to avoid mismatches. Even when adopting foreign practices, their logic and mechanisms should be studied, with supportive conditions created. Meanwhile, institutional arrangements with Chinese characteristics can also contribute solutions to global governance.

Pilot programs in institutional opening-up should adhere to three principles: market demand as the prerequisite, financial institutions providing services that balance risk and return, and strict risk management with sound supervision supported by a robust policy toolkit.

The effectiveness of institutional opening-up will be constrained by domestic structural contradictions. International experience shows that premature financial opening-up amid unresolved structural issues can trigger crises. Therefore, capital market reform and institutional opening-up must advance in tandem, with reform laying the foundation for opening-up, and opening-up setting higher requirements for reform.

Given growing global uncertainty, safeguarding security must be the bottom line of capital market institutional opening-up. It is necessary to balance "opening-up effectively" with "maintaining clear oversight "and "exercising effective control". The ultimate goal is to serve national development and security.

Institutional opening-up is a complex, long-term endeavor that requires steady progress. When introducing international arrangements, their logic must be understood. Those incompatible with China's national conditions should not be adopted. Those for which timing or conditions are not yet ripe should first be supported by domestic reform and piloted for experience before broader rollout.

High-standard international trade and investment rules usually involve more binding provisions and mandatory obligations. With the expansion of global rules in scope and depth, China faces greater pressure in negotiations. Accepting such rules without robust domestic legal and technical systems could create security risks. Therefore, institutional opening-up must always uphold national security, strengthen information security monitoring, and address incompatibilities between domestic laws and international rules.

As China's financial opening-up deepens, its domestic markets have become more sensitive to external shocks. To mitigate risks, multiple measures are needed: advancing structural reforms in finance and institutions; improving macroprudential management of cross-border capital flows by strengthening monitoring and early warning systems; studying price-based tools such as financial transaction taxes; and improving fiscal and monetary governance with greater transparency and consistency.

With the rapid growth of foreign holdings of onshore renminbi assets and stronger linkages across China's stock, bond, foreign exchange and commodity markets, the potential for coordinated external financial attacks has increased. Speculative funds could deliberately short Chinese assets to pressure the exchange rate. Therefore, cross-market, cross-agency contingency plans must be developed, policy toolkits enriched and trading systems improved to ensure preparedness.

As financial globalization deepens, sanctions have become a common tool for some major powers in international disputes. China should expand its anti-sanctions toolkit, accelerate the development of cross-border renminbi payment infrastructure, advance renminbi internationalization prudently, diversify reserve currencies and assets, strengthen external financial liability monitoring, and assess foreign financial exposures in China to prepare countermeasures.

Guan Tao is global chief economist at BOC International (China) Co Ltd and council member of the China Chief Economist Forum. Liu Lipin is a macro analyst at BOC International (China) Co Ltd. The article was translated based on the one published in Tsinghua Financial Review.

The views do not necessarily reflect those of China Daily.