With S$28t, China’s savers are set to change the world

BEIJING — Few events will be as significant for the world in the next 15 years as China’s loosening of restrictions on international money flows, a shift that economists and regulators across the world are starting to grapple with.

With China’s leadership aiming to scale back the role of investment in the domestic economy, the nation’s surfeit of savings — deposits currently stand at 130 trillion yuan (S$28.2 trillion) — will increasingly need to be deployed overseas. That is also becoming easier as Premier Li Keqiang relaxes capital-flow regulations.

The consequences ultimately could rival the transformation caused by the communist nation’s fusion with the global trading system, capped by its 2001 entry into the World Trade Organization (WTO). That stage saw goods made cheaper across the world, boosting the purchasing power of low-income families at the cost of hollowed-out industries in some high-cost nations.

Some changes are easy to envision: Watch out for Mao Zedong’s visage on banknotes as the yuan makes its way into more corners of the globe. China’s giant banks will increasingly dot New York, London and Tokyo skylines, joining American, European and Japanese names. Property prices across the globe — from San Francisco to Sydney to Singapore — have already seen the influence of Chinese buying.

Other shifts are tougher to gauge. International investors including pension funds, which have had limited entry to China to date, will pour in, clouding how big a net money exporter China will be. Deutsche Bank is among those foreseeing mass net outflows, which could go to fund large-scale infrastructure or stoke asset prices by depressing long-term borrowing costs.

HISTORIC PROPORTIONS

“This era will be marked by China shifting from a large net importer of capital to one of the world’s largest exporters of capital,” Mr Charles Li, chief executive officer of Hong Kong Exchanges and Clearing, the city’s stock market, wrote in a blog this month. Eventually, there will be “fund outflows of historic proportions, driven by China’s needs to deploy and diversify its national wealth to the global markets”, he wrote.

The continuing opening of China’s capital account will also promote the trading of commodities in yuan, and boost China’s ability to influence their prices, an analysis by Bloomberg Intelligence showed.

As was the case with China’s WTO entry, where many of the hurdles had been cleared in the years leading up to 2001, policymakers in Beijing have been easing restrictions on the currency, the flow of money and interest rates for years. What is making this year stand out is the International Monetary Fund’s five-yearly review of its basket of reserve currencies. China wants in and is accelerating reforms to get there.

OFFSHORE CENTRES

Recent steps to promote its currency have included the setting up of more offshore yuan centres, a new link between the Shanghai and Hong Kong stock exchanges and letting the tightly controlled yuan trade against the US dollar in a wider band. It has also promised to remove a cap on interest paid to savers.

“The integration of China — the world’s second-largest economy with the highest savings rate, but still a low per capita income — into the global capital markets is an unprecedented event,” China International Capital Corp economists, led by Beijing-based Mr Liang Hong, wrote in a research note this month.

There are already signs of that potential. Chinese buyers topped Canadians to rank as the biggest foreign purchasers of United States homes by sales and dollar volume in the year through March, accounting for more than a quarter of all international spending.

MOVING ABROAD

Lenders are speeding up their ambitions: Bank of Communications, China’s fifth-largest lender, is making its first overseas acquisition by buying a lender in Brazil, while China Construction Bank Corp plans to open branches in Europe, South-east Asia and Africa.

The global community is watching. US Treasury Secretary Jacob Lew noted after meetings this week between US and Chinese officials that Beijing is committed to pushing through necessary reforms to liberalise interest rates, open capital markets and open up more to foreign enterprises. The US wants more access to the world’s second-biggest economy for its financial firms, something that has been elusive since China’s WTO entry.

Few expect the yuan to threaten the US dollar’s role as the global reserve currency for now, with a wave of domestic reforms needed first to reassure international investors, such as bolstering liquidity in the local bond market.

While US policymakers are betting that a more open China will ease currency tensions between the two nations, any rapid depreciation in the yuan could trigger large-scale capital outflows, prompting intervention and new restrictions from China’s policymakers.

“If they’re going to be gradually opening up to be like the US, then vast amounts of money are going to flow overseas,” said Mr David Dollar, who served as US Treasury Attache in China and is now a senior fellow at the Brookings Institution in Washington.

“I would speculate that it favours the US over everything else,” he added.

Other nations, from Argentina to South Korea, have suffered whiplash from volatile capital flows after they eased restrictions. While China is unlikely to tear down the barricades altogether, the opening of the nation’s capital borders will reverberate across the world.

“I don’t think you can find any significant economic system where deposits in the banking system are twice gross domestic product,” said Mr Nicholas Lardy, a senior fellow at the Peterson Institute for International Economics who has studied China for more than three decades. “That’s the potential.” BLOOMBERG