China’s Liberalized Capital Account Interpretation
As Chinese equities regained footing in August, especially against more precipitous neighboring exchange falls, on a PMI reading above 50 preserving the 7 percent GDP growth consensus, investors looking for further support emphasized the prominent but abstract capital account liberalization nod in the latest 5-year plan offered by the new leadership. A recent IMF empirical model based on 40 developing market experiences projects a 3 percent of GDP range medium-term rise in both inflows and outflows. Portfolio allocation remains subject to strict quotas only used to the same regional extent in India. For the main QFII regime the ceiling was hiked to $150 billion in July, and the R-QFII offshore renimbi cap reached RMB 270 billion. The outward QDII channel has also opened but is distorted by domestic interest rate and bond market controls. The regression results estimate a 20 percent of output increase in Chinese assets abroad over time, double the jump in foreign inward capital. Reserve accumulation will drop one-third and the additional stake could come to one-quarter of MSCI emerging market universe size. A $500 billion dollar bond shift in turn would decrease EMBI yields by 250 basis points. The redeployment would drain liquidity from housing speculation and “shadow” wealth management products available from banks and non-banks in the overall interest of financial system modernization, the assessment concludes. Outbound direct investment could likewise outpace the $10 billion/month current FDI figures up 7 percent from 2012 led by the service sector. The strong interest overrode fears of regulatory interference following a crackdown on alleged abuses in the pharmaceutical and consumer goods industries and anti-monopoly investigations. Resident consultants who act as matchmakers and researchers for joint ventures were spooked by the arrest of well-known operators who confessed to the media private data breaches. The moves may also have been designed as indirect retaliation for the slow approval process on a proposed Mainland company takeover of a US major pork producer after Huawei’s high-tech acquisition was rejected by a Treasury Department-headed committee.
The Shanghai exchange recovery was magnified briefly by a trading error at Everbright Securities lifting the local index 5 percent. The firm received harsh official warnings and has otherwise been implicated in a global probe into professional hiring practices which may have involved improper government relationships. JP Morgan has been cited as one institution in the crosshairs as Beijing tries to lure overseas funds and expertise into the four big bad asset management firms preparing for another uncollectible loan buildup. UBS and Standard Chartered participated in Cinda’s 2010 Hong Kong listing and Huarong may be next. Only half the original RMB 1.5 trillion absorbed has been recovered at around 20 percent cash value. Both state and private banks reported credit deterioration in the last quarter, echoing an S&P alarm on a “large corporate debt hangover” by conservative rendering.
