The Strategist

Study: Chinese money may change global financial flows

10/08/2019 - 07:34

Chinese funds that are able to invest in foreign assets prefer to invest in sectors in which China has no competitive advantages, according to a study by the US National Bureau of Economic Analysis (NBER). It is noted that profitability for institutional investors from China is not a key criterion, and diversification of investments and gaining access to information is more important. China has accumulated a large amount of savings, the profitability of which remains extremely low. Removal of capital restrictions on at least a portion of these funds can significantly affect global financial flows.

Calvin Teo
Calvin Teo
Expanding access to gigantic Chinese savings could significantly affect the global financial system, states a study by the National Bureau of Economic Research (NBER). It is noted that only the accumulated volume of deposits in China is equal to 170% of the country's GDP, and reaches $ 22.4 trillion (this is more than the size of the US GDP, which last year amounted to $ 20.5 trillion). The yield on these deposits, taking into account inflation, is minimal or even negative: an average of 2.36% per annum over the past ten years. At the same time, the capitalization of the Chinese stock market is small: at the end of 2018 it amounted to $ 6.3 trillion, the bond market amounted to $ 7.8 trillion.

In 2008, the official reserves of China equalled two thirds of the total foreign assets, which were then equal to $ 3 trillion. Over the past decade, their size has grown to $ 7 trillion, and reserves now account for only 44% of assets. Liabilities for this period increased from $ 1.6 to $ 5.2 trillion, with a net investment position from $ 1.4 to $ 2.1 trillion, making China the third largest lender in the world after Japan and Germany. The decrease in the share of reserves is partially explained by the fact that the Chinese Central Bank used almost $ 1 trillion to support the yuan after the market collapse in the summer of 2015. However, in general, this was the result of the gradual lifting of capital restrictions in the country.

Now Chinese companies can invest in securities in foreign markets only in the framework of several state programs, such as the Qualified Domestic Institutional Investor Scheme (which allows banks, foundations and insurance companies to invest in securities on foreign markets; now the investment quota is $ 103.2 billion). Their main goal is a controlled outflow of capital from the country. Institutional investors prefer to invest in developing countries. For many of them, China has become a major source of direct and portfolio investment. At the same time, significant investments are made in the shares of high-tech companies in developed countries. Mostly, funds from China prefer sectors in which Chinese companies have relatively weak competitive advantages (they are determined by the share in world exports), the authors indicate. At the same time, diversification and access to information when choosing an object for investment are more important motives than obtaining profitability.

Further liberalization of capital flows in the PRC will lead to the fact that a greater volume of Chinese savings will go abroad, and a slight surplus or deficit will be recorded in the current account. China is now the main source of portfolio investment for Cuba, Mongolia, Hong Kong and Macau. At the same time, funds will become a tool with which Chinese private investors will be able to invest in foreign assets, the authors of the study expect.