Some of the world’s biggest fund managers are champing at the bit. Last week China liberalised its overseas investment regulations, allowing mainland investors to gain exposure to foreign funds. These will now be able to tap China’s $2 trillion in bank deposits – the world’s biggest savings pool – without forming mandatory domestic operations. Still, don’t expect “a wall of money” to hit foreign markets just yet, says Lex in the FT. Lifting some of the quotas for overseas investment implies outflows of just $7bn-9bn, which Hong Kong, “the first obvious port of call”, turns over in a day.
Far more significant is the impending launch of an official investment vehicle designed to put China’s $1.2 trillion of foreign exchange reserves to work. About 75% of this burgeoning cash mountain is in US Treasury bonds denominated in weakening dollars; last year China earned just 3% on its T-bonds, according to Standard Chartered. Details remain sketchy, but the new fund is likely to have over $200bn to invest at the outset and to add another $200bn over its first couple of years, with much of the money allocated outside China, reckons Paul Maidment on Forbes.com. It would be “one of the world’s largest investment funds with the potential to become the biggest”. So it could blow out well-thought-out trades “at the touch of a bureaucrat’s button”, says Stephen Green of Standard Chartered.
The fund is unlikely to have an easy time. It’s potentially the equivalent of “Goldman Sachs being run by US Treasury officials”, yet will need “considerable expertise” to manage a gradual diversification from US assets without putting “sudden and politically touchy downward pressure” on US bonds and the dollar, says Maidment.
But where will all this extra liquidity go? As Dan Roberts notes in The Sunday Telegraph, you could buy the entire Asian market and “still not make a dent” in this cash pile. Much of the cash is likely to “wash up” in London, a more welcoming home for foreign cash than the US or Europe. “When this Chinese dam bursts”, the money behind recent UK takeovers will seem like “a trickle”.