♠ Posted by Emmanuel in Casino Capitalism,China
at 5/14/2007 03:22:00 PM
On Friday, I mentioned that China would begin allowing its citizens to invest in equities abroad as a way to cool its overheating stock markets. It didn't take long before those who think US stock markets are on a boundless upward trajectory despite a slowing US economy latched on to this emerging development. Nevermind that the "$2.3 trillion" supposedly headed to America is much more than the combined market capitalization of the Shanghai and Shenzen stock exchanges, but when you're looking for bullish excuses, any far-fetched story will do. From MarketWatch's Mark Hulbert:
I owe the story to Dennis Slothower, editor of a newsletter called On The Money. In his hotline Friday night, he pointed out that the China Banking Regulatory Commission, in an attempt to cool its overheated stock market, had ruled that Chinese banks "can now invest as much as 50 percent of funds in overseas stock markets."Slothower calculates that this means that "up to $2.3 trillion in China monies ... can now move out of China."To put a sum like that in perspective, consider that the total value of all publicly traded stocks in this country is around $15.1 trillion, according to Wilshire Associates. If even a modest fraction of the $2.3 trillion makes its way into U.S. stocks, we could see a "further parabolic advance in equities," as Slothower puts it.
UPDATE: Here is FT's much saner take on China allowing its citizens to invest abroad under the "Qualified Domestic Institutional Investor (QDII) scheme. If you will recall, China previously allowed only money market placements abroad, not equity investments:
Beijing has lifted restrictions on investing up to half the existing quotas for overseas investment – dubbed qualified domestic institutional investor, or QDII – in equities. That implies potential outflows of just $7bn-$9bn. Hong Kong’s bourse, the obvious first port of call, can turn over more than that in a day. And even that amount may not be unleashed immediately. The attractions of, say, Hong Kong stocks pale when contrasted to the domestic market, up 48 per cent this year in local-currency terms...
Nonetheless, the move marks another milestone on the road to a fully convertible currency [not really--sell RMB, buy $ yes, but not the other way around]. It also demonstrates the extent of pressure on Beijing both to offset surging capital inflows and to cool the domestic stock market bubble. The stock market performance is almost wholly driven by captive liquidity, so broadening the investible universe would remove some of the froth. For now, however, the numbers are too small to have much impact on either front – or on overseas markets.
