China Ca$h May Flood U.S. Markets
Forget about sovereign wealth funds. Thanks to a new Sino-American agreement, a bigger influx of cash could be on its way to U.S. markets -- from Chinese institutional investors.
The Securities and Exchange Commission and Chinese regulators signed an agreement on Monday, laying the groundwork for Chinese investors to buy and sell U.S. stocks and mutual funds through the QDII Program.
QDII: What Is It?
The Chinese Qualified Domestic Institutional Investor program, or QDII, started in April 2006. HSBC estimates QDII products worth $50 billion have been approved so far, but that's not a big number versus the $3 trilliondomestic market or compared to the $13 trillion U.S. total market cap according to Roth Capital. The firms in the QDII program are Chinese banks and fund companies.
There could be more cash coming into the U.S. equity markets from China -- via investments by Chinese banks and mutual funds.
China's vast foreign reserve has so far been concentrated in U.S. Treasurys. According to the latest data from the Treasury Department, China held $922 billion in U.S. securities -- but only $29 billion of that in U.S. stocks. Most of the rest is held in U.S. government bonds.
The 'Pro' View:
1) Liberalization of capital markets is a positive
2) Investments made by China's institutional investors more preferable than by China's sovereign wealth funds
3) Good for China, too, as it helps prevent future stock market bubbles by giving investors alternatives
The 'Con' View:
1) The announcement Monday did not give a dollar figure on how much new investment would be allowed, nor did it give implementation data
2) Not likely to see a lot of buying from the Chinese any time soon, as they are still counting their losses from investments in Blackstone and Bear Stearns
3) Neither Chinese fund managers nor their clients know much about the U.S. market and they'd be hesitant to jump into it
4) It's an uneven playing field right now as U.S. investors are still not allowed to invest in mainland China shares.