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Comparison of China’s capital controls with Vietnam’s
Economic theory defines the ‘Impossible Trinity’, also known as ‘the Triangle of Impossibility’, as a nation’s inability to simultaneously pursue three macroeconomic goals: a stable exchange rate, free capital flows, and an independent monetary policy. This theory was named the Mundell-Fleming Model, put forward by Robert Mundell and Marcus Fleming in the 1960s.
Vietnam approaches the triangle of impossibility in much the same way as China does. They both implement capital controls in order to pursue their inflation target, while maintaining exchange rate stabilisation. In a previous article, we examined China’s controls regarding inbound foreign direct and indirect investment capital, in order to draw parallels with Vietnam. Today, we review China’s control on inbound foreign indirect investment capital by individuals.
Two currencies are used within Chinese markets: renminbi in mainland China and Hong Kong dollars in the Hong Kong special administrative zone. In accordance with the Impossible Trinity theory mentioned above, the renminbi is controlled at the expense of free capital flows, while Hong Kong dollars are based on free capital flows and an independent money supply.
There are also two types of shares traded in these markets with different rules, namely A-shares and B-shares, both of which are traded on the exchanges at Shanghai and Shenzhen. A-shares are denominated in renminbi. They can only be traded by Chinese citizens and a small number of foreign institutions with Qualified Foreign Institution Investor (QFII) status. China’s foreign exchange management on QFIIs was described in our article posted in VIR dated November 30, 2015.
B-shares are denominated in US dollars on the Shanghai exchange and Hong Kong dollars in Shenzhen. They can be traded by all foreigners and by Chinese citizens with the appropriate foreign currency accounts. The B-shares market is small, contains many poor-quality companies and generally sees little action. In the mainland China market, foreign investors are only allowed to buy B-shares, with prices quoted in US dollars and Hong Kong dollars, which are free-float currencies. In this regard, China’s authorities don’t have to manage foreign exchange on renminbi with foreign portfolio individual investors.
While B-shares were originally intended to be the main mechanism for foreigners to invest in China, most investors have preferred to focus on shares of mainland Chinese companies listed in Hong Kong, which are available to all investors. These companies fall into three groups: ‘H shares’ are issued by mainland-registered companies in the Hong Kong market (so the same business could have A shares, B shares and H shares outstanding); ‘Red chips’ are state-controlled businesses that are technically registered in Hong Kong, but do the majority of their business in the mainland; and ‘P chips’ are registered in Hong Kong, but are controlled by non-state mainland owners.
The rules on investing in A-shares are likely to be relaxed in the long term, but it will probably take a decade or more for this to take effect. For now, foreign retail investors are confined to the other types of shares.
Recently, some foreign investors have suggested that the State Bank of Vietnam relax the documentation requirements for foreign individual investors to invest in the stock market here. However, Vietnam’s controls are already much looser for foreign individual investors than China’s. Although foreign ownership limits are still applied in Vietnam, foreign individual investors are allowed to invest in all types of securities companies whose prices are quoted in VND, including both listed and OTC shares.
Documentation requirements for opening foreign stock trading accounts is not extensive. Much of the documentation requirements for foreign investors relates to investment capital banking accounts. These requirements adhere to international commitments made by Vietnam to prevent money-laundering activities by foreign investors.
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