CHINA TO INVEST $14 TRILLION ABROAD IN THE NEXT FOUR YEARS: ARE YOU READY?
The chief of China’s central bank, Zhou Xiaochuan*, said earlier this year the government’s ultimate goal is to make the renminbi fully convertible. And in May, a researcher at the People’s Bank of China wrote that the central bank aims to make that happen by the end of 2015. While the timing is still uncertain, David Wong, chief economist at Shui On Development Ltd., a big Shanghai-based property developer, declared that he expects full capital account liberalization “in two years”, reported Newsweek magazine.
It is an ambitious timetable carrying a few risks. If domestic real estate stalls, at best, and the equity market fluctuate like it did during Summer time, investing abroad is certainly enticing for Chinese middle class. The recent very successful launch of several new app for investing abroad is a good barometer of the intention of this growing and rich middle class (visit: http://micaiapp.com/).
We should expect stricter regulations of investment abroad although it is already restricted but the central government will not allow the country’s own economy to be destabilized.
The International Monetary Fund (IMF) has issued warnings along those lines. IMF advises China to be cautious with capital-account liberalization “We wouldn’t advise doing this in one step,” Markus Rodlauer, the IMF’s China mission chief, told The Wall Street Journal in July. Liberalization, especially for interest rates and currency, is necessary to keep China growing at a healthy clip over the coming decades. But it is wary about whether China is ready for significant capital-account liberalization.
According to IMF calculations, a speedy liberalization of cross-border capital movements could produce over several years net outflows from China equal to as much as 15% of the country’s GDP, roughly $1.35 trillion. The Chinese would send as much as $2.25 trillion overseas, while foreigners would invest only $900 billion in China.
A massive number of households investing abroad is only one facet of a potential surge of Chinese money moving overseas. Chinese companies — both state-owned and private — are more aggressively pursuing foreign investment projects, which have been dominated by energy and natural resource deals. That is about to change, as Chinese firms try to diversify their foreign holdings and are now looking into major infrastructure projects.
The question remains are we ready to see sensitive infrastructures to be owned and operated by Chinese companies? Airports, power plants, communication infrastructures…The answer is probably: yes, as long as Western companies can do the same in China but the Chinese central government is not ready yet for such liberalization.
A surge in Chinese corporate investment abroad will likely be controversial. In the 1990s, Japanese purchases of U.S. assets — from movie studios to high profile real estate — created a firestorm. Reciprocity was a huge issue. It will be a far bigger issue as China gets into the same situation, entire sectors of Beijing’s economy, dominated by state-owned companies, are off-limits to foreign investors.
Recent report by The Mercator Institute for China Studies** [established in 2013 and based in Berlin, one of the largest international think tanks for policy-oriented research into and knowledge of contemporary China], says Chinese foreign direct investment is going to grow from $6.4 trillion in assets to $20 trillion by 2020.
It might take a few more years but clearly China is simply taking the next logical step in its ongoing integration into the world economy. This movement is good and will force China to adapt to more openness to the World and will also force Western countries to accept and integrate China as a real partner into the concert of nations. Expect however lively debates about Beijing real intent: domination or integration.
Growth and wealth comes only with peace and this might be the biggest benefit and should be an incentive for all participants.
* Zhou Xiaochuan is a Chinese economist, banker, reformist and bureaucrat. As governor of the People’s Bank of China since December 2002, he has been in charge of the monetary policy of the People’s Republic of China
Libra6 Management is present in Shanghai and invests in Cleantech, Media, Healthcare and Real Estate. www.libra6management.cn.com