China Needs Money -- Evidence In Desperate FDI Actions

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Posted: Sep 11, 2019 11:38 AM
China Needs Money -- Evidence In Desperate FDI Actions

Source: Aly Song/Pool Photo via AP

China is heading for fiscal and current-account deficits amid an escalating trade war. Its response is to encourage FDI.

New Open Door Policy

Bloomberg reports China Is Throwing Open Its Market Door. Be Wary.

China’s latest welcome to foreigners smells of desperation.

Global funds no longer need quotas to buy Chinese stocks and bonds, the State Administration of Foreign Exchange said in a statement Tuesday. That removes a hurdle to foreign investment that’s been in place for almost two decades, since the nation first allowed access to its capital markets.

Scrapping the quota is less a confident liberalization by a maturing economy and financial system than an overt admission that the country needs money. China has been edging dangerously close to twin deficits in its fiscal and current accounts. It needs as much foreign capital as it can get — even in the form of hot portfolio flows — to keep control over the balance of payments and avoid a further buildup of debt.

This thirst for overseas funds explains why China has been opening its financial services industry, allowing global investment banks to take majority control of their local brokerage joint ventures after years of resistance. The question now is whether foreigners will take the bait.

Michael Pettis on FDI Quota Scrapping

Pettis Questions Current Account Thesis

Bonds Not Tempting

Chinese bonds yield almost 1.5 percentage points more than US bonds.

Tempted?

Yuan vs US Dollar 1981-2019

Yuan chart from MacroTrends. Anecdotes mine.

If the yuan was strengthening, an extra 1.5% per year might be tempting.

However, the yuan has weakened 18% since January 2014.

Stability Not

Nothing about any of these actions suggests more stability. It's all about preventing a stock market collapse while praying for a miracle.