There has been a great deal of excitement and press coverage about the supervisory cooperation agreement signed yesterday between the China Banking Regulatory Commission and the Securities and Exchange Commission, which allows Chinese banks to conduct QDII investments for their clients in the US. This is, I think, the fifth such agreement, following those in Hong Kong, the UK, Singapore, and Japan.Chinese funds have been able to invest in the US for several years now, but this agreement allows them to create and market investment products tied to US securities.There are 23 banks in China that have the license to make overseas investments for their clients under these rules.
According to today’s South China Morning Post, “The news will be welcomed by fund managers in New York waiting for the so-called ‘Great Wall of Chinese liquidity’ to hit US shores.”Several other newspaper accounts also referred to this great wall of liquidity that should wash into the US markets.
But I wouldn’t splash on the soap just yet.It might be a while before any serious money actually comes into the US. Even though plenty of Chinese have a fascination with things American, and investing in the US might seem like a great opportunity for them, these funds will still have to face a terrific headwind. They will probably need to earn anywhere from at least 12% to 14% just to match the returns their investors can get from leaving their money in local banks here in China, and the fiasco of recent QDII investments (see my March 26 entry) means that investors are likely to be cautious.
What’s more, I would urge any investor who was considering buying these newly-approved products to think very carefully before taking the plunge. If fund managers have to beat 12-14% just to break even, I would guess that there would a ferocious incentive on their part to gamble wildly. That means some of them might make very high returns that are comparable or better than what Chinese could earn by leaving their money in bank deposits, but at the risk of some pretty ugly performances. After all, already one of only four mutual fund QDII’s recently went into liquidation, after just a few months of operation in which it lost over half the value of its assets under management, and all the others are seriously underwater. That suggests that prudence is not at the top of the list of qualities these fund managers seek to exhibit.
In the long run it is a good thing that Chinese capital markets are being liberalized, but by now I think most of us would have to agree that there will be no wall of money leaving China until there is a significant change on RMB expectations. In fact I have a sneaking feeling that the wall of money will materialize precisely when the local authorities are trying to stave off hot money outflows.Still, with reserves at over $1.6 trillion, and looking like they will easily approach or exceed $2 trillion by year end, I think it will be a long time before hot money outflows are a problem.
I hear a lot of talk here in the US about the implications for the market of the new rules allowing the Chinese to invest abropad and especially in the US. You seem to think this is a tempest in a teacup. Should we expect no Chinese money?
By Doug Place - 4/7/2008 7:56 PM
My best guess is that we might see no more than $5-10 billion of retail money over the course of the year, probably less, and perhaps three or four times that amount if pension funds, insurance companies, and other institutions are "encouraged" to invest in the US. These numbers won't even be noticeable in the US. It makes much more sense to think about the impact of CIC and SAFE investments than to think about QDII investments.
By Michael Pettis - 4/7/2008 8:05 PM
Ｍａｙｂｅ ｔｈｉｓ ｃｏｕｌｄ ｂｅ ｕｓｅｄ ｔｏ ａｃｑｕｉｒｅ ＵＳ ｔｅｃｈｎｏｌｏｇｙ． It's less than ideal timing, although if it starts out slowly it might not be a bad thing for China.
By orgulous - 4/7/2008 10:23 PM
I think its a good thing that the gates were opened *after* you had some high profile foreign investments getting burned. I don't see a huge amount of enthusaism in buying American after the near-miss from CITIC and Bear-Stearns, but anything that encourages capital outflow can't be too bad.
When you say, they will "need to earn anywhere from at least 12% to 14% just to match the returns their investors can get from leaving their money in local banks here in China," are you referring to the demand despoit rate + expected RMB appreciation?
Currently, how is demand for QDII funds focused on Singapore? What about Hong Kong (seems to have the same disincentive as the U.S., given the peg)?
Matt, yes, the 12-14% is a combination of the roughly 4% deposit rate plus expected appreciation of at least 8%. The "headwind" exists for all foreign investments, whether in the US, HK, Singapore or elsewhere.
Michael Pettis is a professor at Peking University's Guanghua School of Management, where he specializes in Chinese financial markets. He has also taught, from 2002 to 2004, at Tsinghua University’s School of Economics and Management and, from 1992 to 2001, at Columbia University’s Graduate School of Business. He is a member of the board of directors of ABC-CA Fund Management Co., a Sino-French joint venture based in Shanghai.
Pettis has worked on Wall Street in trading, capital markets, and corporate finance since 1987, when he joined the Sovereign Debt trading team at Manufacturers Hanover (now JP Morgan). Most recently, from 1996 to 2001, Pettis worked at Bear Stearns, where he was Managing Director-Principal heading the Latin American Capital Markets and the Liability Management groups. He has also worked as a partner in a merchant banking boutique that specialized in securitizing Latin American assets and at Credit Suisse First Boston, where he headed the emerging markets trading team. Besides trading and capital markets, Pettis has been involved in sovereign advisory work, including for the Mexican government on the privatization of its banking system, the Republic of Macedonia on the restructuring of its international bank debt, and the South Korean Ministry of Finance on the restructuring of the country’s commercial bank debt.
Pettis is a member of the Institute of Latin American Studies Advisory Board at Columbia University as well as the Dean’s Advisory Board at the School of Public and International Affairs. He is the author of several books, including The Volatility Machine: Emerging Economies and the Threat of Financial Collapse (Oxford University Press, 2001). He received an MBA in Finance in 1984 and an MIA in Development Economics in 1981, both from Columbia University.
Subscribe to this Site
Comments (7) for "The Great Wall of Chinese li...
- 4/8/2008 1:23 AM
January, 2008