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    China Business
     Apr 10, 2008
US stocks open to China savers
By Richard Komaiko

Chinese individuals can now invest in United States stock markets through China's Qualified Domestic Institutional Investor (QDII) program, following the signing of an agreement by the China Banking Regulatory Commission (CBRC) and the US Securities and Exchange Commission on Monday.

Economists in Asia for the most part were guardedly optimistic about the move, suggesting that any change in capital outflows will be evolutionary rather than revolutionary. In this respect, they cited the course of events after Hong Kong stocks were included in the program in 2006. Investors bid up stocks there in anticipation that mainland funds would spend heavily on H-shares (mainland-based companies listed in Hong Kong). That money did not however materialize in significant amounts.

Economists said the agreement with the US opened a channel for


mainland money to be reallocated to wherever it can be most efficiently invested. Money will most likely be forthcoming in due course, based on real economic factors.

Factors determining those flows include the performance of mainland China's domestic share markets and the paucity of alternatives in which Chinese can park their savings and earn positive returns.

The benchmark Shanghai Composite Index more than doubled from 2,675 to over 6,000 in the first 11 months of last year, although only a small part of this surge reflected actual growth of the Chinese economy.

Ordinary Chinese turned to the stock markets as inflation combined with low interest rates on traditional savings accounts yielded negative real rates of return on their money. The few options to park their cash include stocks. Last year, fueling and fueled by surging stock values, millions of new investors moved into the market last year, creating a speculative bubble that has since burst.

The Shanghai Composite Index has fallen by 29.6% since November 22, 2007, but the fundamental economic conditions that created the bubble, namely a low rate of return on savings coupled with high inflation, still persist. Investors deterred or hurt by the fall in stock values would therefore be expected to pump money back into the equity market as confidence returns or savings again rise. In that context, US stocks might appear attractive - the S&P 500 Index has declined only 4.8% since November 22.

The sustained 10-year boom in the Chinese economy is also showing signs of faltering.The country's business climate index, a key gauge of corporate performance, was down 7.4 points in the first quarter of the year from the fourth quarter of 2007 and 3.5 points year on year. 

The expansion of the QDII program also has implications for the American economy and government, faced with having to finance a federal budget that is larger than any other country's economy except Japan. The private sector of the US economy is suffering from a crippling credit crunch and may be entering the worst American recession since 1929.

At the same time, China holds large amounts of US securities - about US$1 trillion - but as of last June only $29 billion of that was in US stocks, with most of the rest held in US government bonds, according to a Marketwatch report this month.

This essentially means that roughly $1 trillion that might otherwise be in circulation in the private sector is instead concentrated in the coffers of one corporation: the United States government.

It is unlikely that the present credit market tightness holding back the US private sector is unrelated to this allocation of capital. This is not to say that America's current woes are China's fault.

The situation America finds itself in today is the result of eight years of its own misbegotten policy choices. However, the expansion of the QDII program should be viewed as a means of closing a loop and reorienting the balance between America's government and private economy.

Richard Komaiko researches Sino-American relations, economic policy, terrorism and national security. He holds a degree in economics from the University of Illinois and has studied Chinese language and culture at the University of Illinois, University of Chicago and the Beijing Institute of Education.

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