China's domination of global finance about to take a quantum leap

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asked Sep 22 in 3D Segmentation by freeamfva (7,760 points)

Is China quietly preparing to transform the market for global investment funds, just as it has remade global trade and manufacturing?To get more China finance news, you can visit shine news official website.

As reported in the Financial Times, "What happens if Chinese household wealth is unleashed on the world?" published on July 5, a Chinese official in the government agency that administers foreign exchange had said in February that officials were considering whether the $50,000 allowance each individual is entitled to could be used to invest in securities and insurance products overseas.

At present, it can only be used for expenses such as foreign travel or education costs. Meanwhile, the Chinese government has approved increasing outflows of foreign investment through an official quota. And, also as reported, China is due to launch an investment program in tandem with Hong Kong, to be called Wealth Connect, which will allow individual investors in southern China to invest overseas.

China's savings rate is very high, at about 40% of gross domestic product. This compares to an average of less than 35% in other emerging economies and below 25% in most advanced economies. The amounts involved are huge. According to estimates by HSBC, again as reported in the Financial Times, Chinese aggregate household savings will total a staggering $46 trillion of potentially investable assets by 2025. This is equal to the value of the entire U.S. bond market.

By comparison, India, for example, has domestic household savings on the order of $500 billion. If India suddenly allowed its households to invest abroad, the amount would be a trickle in global financial markets. If China fully opened up foreign investments to its households, the result would be more like a tidal wave.

China is already a huge player in U.S. and global financial markets through official purchases of foreign securities as the country continues to run large trade surpluses with many trading partners, most notably Washington.
At present, China owns about $1 trillion in U.S. Treasury securities. It is no exaggeration to say that spending by notoriously profligate households and a U.S. government that continues to run massive budget and trade deficits are being financed by Chinese savers. The sums involved are so large that they have fundamentally changed the nature of global financial markets.

In a sense, China's increasing domination of global finance, which could take a quantum leap if household savings are fully unleashed, is the flip side of its increasing domination of global merchandise trade. Ever since China joined the World Trade Organization in 2001, Chinese exports of manufactured goods have become increasingly important, weathering the global financial crisis and even the COVID pandemic. China remains the world's workshop, and this is likely to continue for years to come.

Just as China pursued a gradualist track to opening up international trade, it is likely to be equally cautious in opening up foreign markets to its domestic savers. A precipitous opening-up could wreak havoc not only with Chinese markets but in global markets as well, given the magnitudes involved.

A key reason why Chinese officials are slowly opening up investment possibilities is to tamp down an overinflated domestic market that in many sectors, such as property, is entering bubble territory. Too rapid an opening could cause a crash in the domestic market and a sharp drop in the value of the yuan, which has been appreciating recently as foreign money pours into China.

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