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
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
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 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.