Chinese funds flow overseas 0 comments

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The attention so frar has been on foreign domestic investment flowing into China, which has become the "factory of the world". However, in this span of time China's foreign reserves have burgeoned so much from external trade that it is now in a position to invest the excess funds overseas.

In fact, this has been done for the last few years in the US capital markets as a strategic measure to shore up the US dollar, and by direct relation keep the China renminbi weak to facilitate its export-driven growth. Hence the phenomenon of China financing the buying habits of the US consumers by mopping up bonds and bills on the US markets ie. lending to the US government. This has had the added advantage for as long as US consumers keep spending, China's factories will keep running to churn out the supply line of goods --- a win-win situation if there ever was one.

At the same time, Chinese businesses have been trying to expand their presence overseas, sometimes with stiff foreign opposition. The balance of power is still more unequal than all the press hype over China and India will have us believe. It is still tilted towards the West. The latter was the chief provider of FDI that drove China's workshop economy to what it is today, and the MNCs in the home countries are loath to have the Chinese countries try to take them on their home turfs instead. So as far as acquisitions are concerned (a main way by which China companies are trying to expand overseas), there have been successes and failures. The former would include the merger of Lenovo with IBM's PC division, while the latter would include Hai-er's unsuccessful bid for Maytag, owner of the venerable Hoover vacuum cleaner brand. And where strategic resources, in particular oil and gas, are concerned, acquisitions have been even more difficult and the competition fierce: witness CNOOC's futile bid for Unocal and CNPC's tight battle with India's ONGC over Petrokazakhstan (the former ultimately prevailed).

Yet, to share investors nowadays, what must be the most interesting overseas funds flows by Chinese investors would be the gradual relaxation of regulations on Chinese financial units that allow them to invest in overseas markets. Insurers have been a key beneficiary of such capital control relaxations, in part because they faced imminent competition from foreign insurers who would be progressively allowed access to the China market under the WTO agreement. Thus, their hitherto narrow investment scope was expanded to Chinese government or corporate bonds issued in overseas markets as well as overseas bank bills, certificates of deposits or other money market instruments with an AAA rating, in late 2004. Then in late 2005 this was further expanded to include stocks of Chinese enterprises listed in selected securities exchanges: New York, London, Frankfurt, Tokyo, Singapore and Hong Kong.

Now this might shed some light on the recent rally of China stocks. Given that most China companies list either in Hong Kong or Singapore (very rare in the Western markets, only the most elite) and that Singapore-listed China companies were rather cheaply-priced, it was no wonder that the rally at the start of 2006 was so sharp for these stocks. This was a liquidity-driven rally if there ever was one, and as China further relaxes its foreign investment guidelines, there may be more market instruments, not necessarily China-linked, that see inflow of Chinese hot money. In a way, that might be how the rest of Asia shares in the fruits of China's red-hot growth.

References:
(1) People's Daily Online article Aug 19 2004: Insurers allowed to invest overseas
(2) China Daily article Sep 12 2005: Overseas investment rules boost insurers