Chinese moneybags coming to market

HONG KONG: Chinese big-money investors, who are sitting on a mountain of savings, could soon come stampeding into the Indian and other global stock markets, after the government unleashed them on the world on Friday in an effort to cool down China’s overheated markets.

The China Banking Regulatory Commission unveiled regulations permitting Qualified Domestic Institutional Investors (QDII) to invest in overseas stock markets, subject to some limits.

This means that private investors in China with a minimum investment of 300,000 yuan ($40,000 or Rs 16 lakh) each can channel their money through QDIIs into stocks on overseas exchanges. Until Friday, they could only invest in dowdy fixed-income and money-market products, which offer low returns.

The move is the latest from China’s policymakers aimed at steering liquidity away from China’s high-on-adrenaline stock markets, which, experts fear, have moved into frothy, bubble-valuation territory.

“This broadly expected move marks the first time that the mainland has formally allowed portfolio equity outflows,” says UBS chief Asia economist Jonathan Anderson.

“As such, this is yet another benchmark in the process of capital account liberalisation in China.”

“The move will provide Chinese investors an opportunity to arbitrage the massive valuation gap between the over-valued (domestic) share market and the global markets,” says HSBC’s China economist Qu Hongbin.

The Hong Kong equity market, which is technically an ‘offshore’ market for mainland Chinese investors, should be the main beneficiary of a Chinese capital outflow, he added.

Stuart Smythe, division director and head of equity, India, at Macquarie Securities says if Chinese banks have been given permission to invest outside of China, which is the most dynamic markets in terms of performance year to date, they will similarly want higher returns in external markets.

“India, with the fifth-largest market capitalization in Asia, and with one of the best growth rates in the region, would surely be an attractive investment option,” Smythe said.

“If such a door is opened, then Chinese investors will first look at India, rather than any other market,” believes Vijay Kedia, managing director of Kedia Securities, citing India as the only country that has been able to almost match the kind of growth being witnessed in China.

Over the past one month, India’s market capitalisation has grown 9.95%, lower only to Vietnam’s (28.97%) Pakistan’s (11.94%), and China’s itself (22.99%).

Other regional stock markets too could feel the rush of Chinese money.

And although Indian stock market valuations look stretched, they could still seem attractive for their earnings growth outlook.  Under the new regulation, commercial banks can invest up to 50% of funds in the QDII program in overseas stock markets.

However, commodity derivatives and hedge funds are still out of bounds for investors. In addition, there is a 5% ceiling on any single-stock investment as a share of QDII funds’ net asset value.  “As we have long argued, providing Chinese savers access to  financial markets to increase diversification-led outflows is the best option to recycle  FDI and trade surplus,” Qu said.

UBS’ Anderson, however, says the outbound portfolio flows will only be of the order of $7 billion.From a macro point of view, the numbers are far too small to make a difference to the external balance, too small to impact the available supply of funds to the domestic share market and too small to have a significant effect on global equity markets - with the possible exception of Hong Kong, he adds.

However, there is another bigger pile of money waiting to flow out from China that will have a far greater impact on global financial markets: from the newly-created State Investment Corporation.

Anderson says the new SPV could receive an initial capitalisation of up to $200 billion in forex reserve, and is expected to raise further capital in the domestic bond market of perhaps $10 billion per month — all to be invested in overseas markets.

“Even if we assume that only one-third of the total assets under management made their way into equities, this is a potential $120 billion in new funds going into global stock markets over the next 18 months.” And that, he adds, is a “much more serious sum.”

With inputs from Sanat Vallikappen