China’s Deepening Integration into Global Financial Markets: Lessons Learned from Its US Counterpart

China’s deeper integration into global financial markets and the lessons learned from its US counterpart includes, among others, the following developments: First, the emergence of China's largest banking sector in the world in terms of Tier 1 capital and a more diverse financial system including insurance and non-bank financial institutions and a rapidly growing stock and bond market. Second, deeper market-oriented reforms including the reduction of implicit guarantees, interest rate, and capital account reforms to improve the stability and efficiency of the financial system and in addition an integration into the global financial system. Third, a transition from indirect bank-based to direct market-oriented financing to serve the real economy. In addition to introducing a more market-oriented, registration-based Initial Public Offering system, Chinese authorities have also fostered innovations and created an electronic trading system similar to Nasdaq's model. This has contributed to the addition of many more technology companies to the Chinese stock market. Progress has also been made in the Chinese bond market and the financial sector has become more open. In addition, China has eased restrictions on foreign real estate in the financial sector. Fourth, the recent rapid increase in foreign holdings of onshore RMB-denominated Chinese securities has been caused, among other things, by the massive expansion and opening of the Chinese capital markets to the outside world; the gradual broadening and deepening of the opening of the capital markets; the inclusion of Chinese securities in global indices and investor portfolios; the liberalization that allows foreign investors greater access to hedging instruments and relatively higher interest rates on Chinese corporate and sovereign bonds.