China Needs Money - Evidence in Desperate FDI Actions, Not Words

-edited

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.

Mike "Mish" Shedlock

Comments (17)
No. 1-11
Tony Bennett
Tony Bennett

"China’s latest welcome to foreigners smells of desperation."

...

Absolutely.

Never bought any of their tough guy act ... and how Xi would just sit back and wait to deal with next Administration. Though population growth slowing China still added 15 million people last year. Their employment / population is 65%. That is 10 million NEW jobs ... A YEAR ... they need to create.

They are desperate. Much more so than US.

Webej
Webej

Typical emerging market, twin fiscal and current account deficits, desparately looking for foreigners to buy up domestic assets ...

Are we talking about China or about the USA?

lol
lol

The average wage in China is $200 a MONTH,so the billion plus Chinese can't afford to buy well......anything,with forces them to depend solely on exports (or money printing)to drive there economy. There only real customer ,Americans are too flat ass broke and in dept ,completely dependent on big govt for a check to buy anything period....so who gonna buy all their shoddy Chinese junk?

caradoc-again
caradoc-again

Knock on is commodities (Australia etc - 30% of exports to China?) and Germany/Eu/UK (cars).

Will go full circle and ultimately be felt in US downturn after some delay. Overall deflationary. What will CBs do to compensate? 3 guesses, 2 answers, lower rates & devaluations.

$ gets stronger etc.

One big boomerang. All coupled.