What do think this means for the markets?
U.S.: Stock Exchanges Open Doors to Chinese Banks
Stratfor Today » January 30, 2008 | 1408 GMT
The U.S. Securities and Exchange Commission (SEC) is set to sign a memorandum of understanding with the China Banking Regulatory Commission allowing Chinese banks to buy shares in U.S. stock exchanges on behalf of Chinese investors within a matter of days, the Wall Street Journal reported Jan. 29. A dose of SEC input could be exactly what mainland banks need to deliver overseas investment products that truly appeal to China’s picky investors.
Analysis
The U.S. Securities and Exchange Commission (SEC) and the China Banking Regulatory Commission (CBRC) are set to sign a memorandum of understanding allowing Chinese banks to buy shares in U.S. stock exchanges on behalf of Chinese investors within a matter of days, the Wall Street Journal reported Jan. 29.
Chinese banks currently act as the middle men between Chinese financial entities (such as mutual fund companies and insurers) that sell U.S. stock funds and Chinese household investors in the Qualified Domestic Institutional Investor (QDII) scheme. The forthcoming U.S.-China agreement reportedly will give mainland banks the right to design and directly sell U.S. stock mutual funds themselves, expanding their independence and profit margins.
The CBRC has signed similar agreements with its counterparts in Singapore, the United Kingdom and Hong Kong. The commission also is talking with Japan and Germany about similar deals.
So what does this mean for the U.S. markets?
First, if Singapore’s recent experience is any indication, the share prices of Chinese firms listed on U.S. stock exchanges likely will receive a short-term boost when the deal is confirmed, based on expectations that Chinese banks will start by buying into large Chinese companies already listed overseas because of brand familiarity and “guanxi” (connections).
Second, this SEC-CBRC agreement framework theoretically will give U.S. financial regulators greater oversight over the volume and nature of deals being struck between U.S.-listed entities and Chinese equity investors — assuming that only the largest and most resilient Chinese banks are allowed into this deal. By guiding the composition and size of U.S. mutual funds that Chinese banks can develop and sell, America’s financial planners should have better insight into which sectors/companies Chinese capital likely will flow toward in the future than they would if Chinese retail investors invested in the United States via multiple unofficial and hard-to-trace investment channels.
Third, this opens up an opportunity for U.S. equity markets to tap into China’s $2.4 trillion in savings. Beijing already has approved more than $50 billion of QDII products to go overseas, HSBC Holdings has estimated.
Chinese uptake of QDII products has been slow, mainly because investors lack a clear understanding of these more sophisticated financial instruments, prefer the rates of return on Chinese equity deals and are being swayed to keep their monies closer to home as the yuan continues creeping upward. China’s financial planners have thus been continually tweaking and expanding the array of products offered.
Most of the Chinese money coming into the U.S. equity market via the QDII will come from savings, not new or recycled loans. (Beijing has explicitly forbidden the use of loans for such investment.) So, of greater concern is the potential for Chinese banks to make poorly assessed investment decisions in foreign equity markets, thus losing Chinese investors’ life savings. If China’s overseas shopping spree continues at its current pace — significantly faster than the development of its foreign investment risk monitoring — then an overseas bad debts problem could one day replace China’s local nonperforming loan problem.
A dose of U.S. input could be exactly what mainland banks need to create overseas investment products that appeal to picky Chinese investors. Depending on how markets play out in the coming weeks, cheap U.S. equity pickings might be all it takes to spark their interest.
