China's response to wild swings in its stock markets risks an embarrassing setback to the country's push to internationalize its financial system, according to investors.
Two weeks of panic selling in China's stock markets has prompted largely ineffective lever-pulling by Chinese authorities, who have launched a raft of measures aimed at stemming the volatility.
Investors say constant tinkering with monetary policy and regulation to try to temper the stock market slide raises wider questions about whether China is ready to open up its capital markets and have more influence in the international financial system.
"The psychology of the Chinese authorities is to control things, but opening up capital markets requires them to lose a lot of control," said Charlie Awdry, China fund manager at Henderson Global Investors.
The near-30 percent stock market plunge comes as Beijing is lobbying for its domestic shares to be included in top global share indices such as MSCI Inc's (MSCI.N) Emerging Markets Index .MSCIEM. and for the yuan to be in the International Monetary Fund's basket of currencies.
China wants more foreign capital in its markets to provide cheaper long-term financing to its companies and to balance domestic retail investors' momentum-driven behavior with more sanguine long term flows from institutional investors.
Having the yuan in the IMF's collection of global currencies that form the Special Drawing Rights (SDR) - a reserve asset class - would expand the currency's role in international trade and investment.
While stock market volatility is not part of the criteria used to directly decide on MSCI or SDR inclusion, China's handling of markets in the past two weeks will not help its case that it should have a more influential role in global finance.
"What's not helping here is the way authorities are trying to micro-manage the equity markets," said the head of the China division at a global regulatory organization who could not be named for compliance reasons.
"That is damaging their market reform stance that they have adopted in recent years".
STAYING AWAY
Foreign investors largely keep away from China's markets in comparison to other fast-growing economies. They account for less than 1 percent of the mainland equity market compared to nearly a quarter for India, according to Thomson Reuters data.
China limits overseas investor access to its markets but has been trying to gradually open them up.
A landmark scheme linking Hong Kong and Shanghai stock markets launched last November has failed to get much foreign participation, with concerns about stock ownership and how trades are settled dogging investors.
The volatility could also delay plans to launch a trading link between Hong Kong and Shenzhen, mirroring the Shanghai program.
"Beijing's policy today no doubt will deepen foreign investors' concerns on whether to enter the A share market, especially for those who believe in the free markets," said Qing Chen, executive director at Gold Mountains Asset Management in Hong Kong.
Some foreign investors though see China's policy measures to try and stabilize the stock market as long-term positives.
The benchmark Shanghai composite index .CSI300 is still up 10 percent so far this year.
"If the market manages to stabilize around where we are now, in a few months' time we'll say this has still been a very strong performance by China stocks this year," said David Gaud, senior portfolio manager at Edmond de Rothschild Asset Management in Hong Kong.
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