Americans Are Investing Billions In Corporate China. It’s Time China Returns The Favor. - Jean Pierre Bansard Commercial Real Estate Development Firm.
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Americans Are Investing Billions In Corporate China. It’s Time China Returns The Favor.

Americans Are Investing Billions In Corporate China. It’s Time China Returns The Favor.


China wants to free Huawei from the entity list and allowed to buy important U.S. components. Okay. Deal. China wants shipping giant COSCO to be freed of Iran-related sanctions. Okay, but what is in it for me? That is what the Trump administration should be thinking on Thursday as the two sides meet yet again for trade talks already expected to be another round of two steps forward, two and a half steps backward.

China trade has been a one-way street. It is time for some reciprocity.

American money is flowing into China stocks and bonds like never before. Billions, in fact, are being mandated to invest there as indexes like the Bloomberg Barclays Global Aggregate Bond Index and the MSCI Emerging Markets Index are increasing their weightings to China. Their sensible argument is that the world’s No. 2 economy demands a bigger role in the global capital markets. China is only 3.6% of the MSCI All Country World Index. The U.S., the world’s No. 1 economy, accounts for 54.1%.

It’s only rational for global investors to want to invest more money in the world’s most powerful and growing economies.

That rationale does not register in China. Well, it might register with the average investor, but it doesn’t register with policy makers who do not allow any serious money out of the country.

It’s time for that to change. At the very least, it would be a good faith measure, one that is easily measurable as opposed to creating some intergovernmental task force to monitor whether or not China is abiding by its own intellectual property laws and cutting subsidies to strategic, high-tech industries. Watching China money flow into the U.S. stock exchange is not rocket science.

Here’s how much the Chinese invested in the U.S. stock market so far this year: $5.4 million, according to data from Morningstar Direct. That’s right: 39 million yuan, which is $5.4 million. To put that into perspective, according to estimates from China International Capital Corp, the weighting for the A-shares in the MSCI Emerging Markets Index alone is estimated to bring in $22.7 billion to corporate China. Billions versus millions.

The Matthews China Fund (MCHFX) alone has $697 million of American money invested in Chinese companies like Alibaba, Tencent, Ping An Insurance and Chinese state-owned banks.

Meanwhile, China invests next to nothing in U.S. mutual funds.

Forget the fact that China is a low-cost hub for American manufacturers like Apple, helping keep costs down for consumers. And forget the fact that China is a big holder of U.S. Treasury’s. They are not big enough. American citizens are way bigger. And so is Japan. The point is, the flow is going one way. It’s American portfolio money being sucked into China, by mandate, and no China portfolio money coming here.

Make no mistake about it, Chinese individuals and institutional investors would love to put money in the U.S. They are restricted. Washington should ask Beijing to move faster on lifting those restrictions.

China already has a policy in place for its locals to invest in overseas securities. The Qualified Domestic Institutional Investor (QDII) program is 13 years old. Most of the money goes to Hong Kong. Perhaps some of it then finds its way into the United States, but that is unclear.

QDII began with just six institutions and an approved investment amount of $12 billion total.

As of August 2019, there are 152 institutions with an approved amount of $104 billion, though again, most of it goes to Hong Kong and Singapore.

The limit has been increased from time to time, but there is no official announcement on further relaxation of the QDII. A proxy to look into the interest of Chinese investors on foreign assets is on QDII funds, which is small relative to the allowed maximum but still indicative. Although Hong Kong is the most favorable destination, Chinese investors are interested in the U.S. stock market.

The U.S. went from around 13% of QDII allotments in mid-2015 to 37% in mid-2019, but the numbers are small relative to the opportunity. Compared to what the U.S. pumps into China’s stock market, it’s chump change.

“There is indeed an interest from Chinese residents to investing in U.S. assets,” says Alicia Garcia Herrero, chief Asia Pacific economist at NATIXIS in Hong Kong. “In the future, it is possible that the Chinese authorities will explore the further relaxation of the QDII as there is a fundamental need for overseas asset allocation. But the pace will be more cautious because of fears of a weaker currency.”

China doesn’t want to return the favor and allow its locals to open up broker accounts with U.S. financial service firms, because it thinks the yuan will tank.

They saw what happened with the Asian Tiger Crisis of the 1990s. They have a billion people to keep in line and don’t want anything remotely similar at home.

But who is to say that the yuan would suddenly go from 7.13, as it is now, to 14 to the dollar? And who is to say that capital inflows into China, based on increased benchmark weighting alone, would not help balance some of that out? China is not Thailand. It surely is not Turkey or Argentina. This is the world’s No. 2 economy we are talking about.

China may also fear that its real estate market would collapse as most middle-income locals who already have investments in Hong Kong or Singapore are stuck in the local stock market or housing. That market could surely take a hit if they were allowed to open foreign investor accounts. Such are the structural changes needed to take place in China. It is those structural changes, as massive as they are, that– perhaps–make Beijing move slower than investors want them to move.

No one is telling China to match U.S. inflows dollar to dollar. But come on, $5.4 million into the U.S.? Even quadrupling that to $25 million is nothing. In other words, China can still have controls as to what flows out by increasing its QDII cap, instead of opening it up fully. Why don’t they do that? Goldman Sachs and JPMorgan, now fully set up in China, can open accounts with local investors to own their mutual funds here in the States.

For years, Wall Street has argued that an open China market was great for them. Big banks wanted to set up shop in the mainlan in order to serve China’s ever-expanding middle class and its growing lineup of billionaires. They could hire equity analysts to look at the thousands of stocks listed on Shanghai and Shenzhen exchanges. It’s a new market, a new world, with hundreds of millions of new investors. Nothing like that exists anywhere in the world.

Why not bring a million of them to the United States, and allow them to buy Disney and Apple stocks, American real estate investment trusts and master limited partnerships in oil and gas? This should not be that difficult. The opportunity would be the same, only instead of bringing it to China, you would be bringing it here. China gets U.S. investor money because U.S. investors want to be in China, and the U.S. gets China investor money because China investors want to be invested in the U.S. That is as rational as adding China’s A-shares to the MSCI Emerging Markets and All Country World Index.

“They think if they open the flood gate it’s going to be out of their control,” says Lu Yu, a fund manager for Allianz Global Investors by way of Wuxi, China, and now a U.S. citizen in San Diego.

She says China’s new Shanghai-Hong Kong stock and bond connect, along with the new Shanghai-London connect, are Beijing test drives to further opening its capital account and monitor exit flows.

“Even countries like Korea have capital controls, and that is why MSCI still has them listed as an emerging market and not a developed one,” Yu says. “I don’t think China is alone in capital controls, but people will pick on it because it is a giant market, and they want more from it than what they’re getting. I personally don’t see them expanding QDII because of fear of losing domestic savings. It’s a frustration for asset managers. I would be very happy to have new Chinese clients.”

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Commercial Real Estate CEO Jean Pierre Bansard

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