The Chinese government’s unexpected announcement in August that mainland Chinese investors would be allowed to access Hong Kong’s stock market without restriction sent the Hang Seng index through the roof.
While China’s capital account has remained closed, restrictions on individual remittances overseas mean that burgeoning Chinese savings have been largely stuck in low-interest-bearing deposit accounts. What international portfolio investment has been made hitherto has largely been in the form of the somewhat anaemic qualified domestic institutional investor scheme.
The stock-starved individual Chinese investor is now unleashed on Hong Kong and hungry for assets. And since it is expected that the new scheme will eventually be opened to all investment markets, excited analysts have begun talking of a “China bid” that will push asset prices globally to hitherto unprecedented levels.
What happens in practice might be quite different. Certainly, domestic Chinese investors are likely to try their luck in Hong Kong. A local market increasingly dominated by mainland stocks, mainly banks, oil and technology companies, and now accounting for more than 42% of the index by weighting, gives Hong Kong an increasingly Chinese feel. And the valuation differential between Hong Kong-listed ‘H’ shares and mainland-listed ‘A’ shares in the same companies has fuelled speculation that mainland investors will quickly eradicate this so-called arbitrage.
According to research by UBS, as at the end of 2005, Chinese private wealth, measured as the sum of bank deposits, government and corporate bonds and equity market capitalization, stood at some $5 trillion. A lot of money, certainly, but less than 25% of Japan’s private wealth and around 6% of the US and EU combined. And although China’s rate of wealth accumulation is certainly increasing, UBS calculates that by 2010, China’s private wealth will still be just 10% of the combined US/EU total.
But China’s capital account, officially closed, is leaking like a sieve and an open current account combined with lax FDI rules makes it very easy to disguise hot money flows. Chinese private money has been investing internationally for years.
There is no doubt that the move to free individual investors in China is significant, if only for its symbolism and that, eventually, Chinese investors will play a critical role in the operation of global capital markets. But do not expect a wall of money to hit Hong Kong suddenly; the money has been flowing for years already.
