On a recent trip to Europe, your scaly correspondent was delighted to note the growth of China’s cultural tentacles in foreign climes. The British Museum is currently wowing Londoners with its terracotta warriors exhibition, while the recent relaxation of travel restrictions to parts of Europe has led to a surge of Chinese tourists filing through designer boutiques.
Chinese business interests in Europe are also expanding beyond the restaurant trade into hotels, partly to accommodate these well-heeled tourists.
Milan’s San Tomaso Hotel, for example, sounds and looks like a typical Italian pensione, but the place is as Chinese as Peking duck. Owned by a group of mainlanders who made their lira the hard way as immigrants, San Tomaso now has a sister hotel in Milan, and there are plans to open more.
As Beijing continues to loosen its grip on China’s capital account, however, it will become easier for mainlanders to invest abroad directly by converting renminbi into euros and dollars.
Last month the central government relaxed controls on individual renminbi currency exchanges as part of its move to allow individuals to invest in Hong Kong stocks. This came after the central bank launched currency swap trading on the interbank foreign exchange market, giving mainland companies easier access to cheap foreign currency.
What all this points to is a faster liberalization of China’s once watertight capital account. Under the qualified domestic and foreign institutional investor schemes (QDII/QFII), local brokers and asset managers have been allowed to buy limited foreign assets, while foreign investors have gained some exposure to the domestic stock markets.
Where once China sought to avoid capital flight, now the combination of a huge balance of payments surplus, upward pressure on the yuan and excessive liquidity in the system makes letting out some of the hot air an economic necessity.
Fat Dragon’s sources tell him that a further relaxation on capital inflow controls is likely to be announced at the next meeting of the US-China Strategic Economic Dialogue in December.
On the other side, greater capital account convertibility for companies and institutions is likely to be the next step in the liberalization process.
Allowing individuals to invest in Hong Kong stocks is a trial run before Beijing opens up foreign investment completely to the country’s millions of hoarders. Until now, capital controls have kept domestic investors insulated from international markets – and protected international markets from a potential tsunami of Chinese savings looking for a safer bet than the volatile domestic stock markets.
So does this mean that brokers and fund managers in New York should be designing new products for trillions of under-invested yuan? Not yet.
Despite predictions that the announcement would see investors clamoring to snap up Hong Kong stocks, at time of writing the rules were still being thrashed out. And even if there is an appetite for household names that trade more cheaply in Hong Kong than in Shanghai, this doesn’t mean investors are ready to sink their savings into foreign names they may not have heard of.
Nor is Beijing likely to loosen all controls on the capital account until it believes that banks have a genuine grip on lending, as any significant capital flight could push up the banks’ bad debt ratios.
Mainland Chinese investors will, in time, become a major force in world capital markets. But it will be several years before this Chinese dragon-hoarder invests his crock of gold overseas.