Wall Street Chases the Dragon — China’s Plans for Bond Purchases

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Overnight the big news on Wall Street was the massive tech sell-off.

After weeks of gains, it seems the US markets are finally cooling off a bit. Which shouldn’t really surprise anyone.

Whether it is the start of a new trend further downward though, remains to be seen.

Which is why today, rather than talk about the story that everyone else is, I want to explore another development. One that won’t receive nearly as much attention as it probably deserves.

See, according to early reports out of China, the Middle Kingdom is planning to make bond purchases easier for foreign investors. Aiming to legislate direct investments in exchange-traded bond products.

Now, while that may not mean much to your average investor, it will have ramifications for them.

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As China’s central bank put it:

This is set to enhance institutional arrangement for bond market opening up and facilitate the investment in yuan bond assets

It will encourage inflows of medium — and long-term overseas capital.

In other words, a whole lot more money will begin to head to Chinese shores. Especially money from Wall Street…

Which may strike you as somewhat of a surprise, given the US–China trade war is still going strong.

But when it comes to finance, they don’t seem to care.

Opening the floodgates

Now, keep in mind that foreign investment in Chinese bonds isn’t new altogether.

These proposed changes would simply make it easier to invest directly. Adding to the huge interest that the market has seen lately.

According to the South China Morning Post the amount of yuan-denominated bonds held by foreign buyers is up 42.8% year-on-year. Totalling some US$359.9 billion at the end of August.

On top of that, US$17.21 billion worth of purchases were made last month alone. Showcasing that the appetite for these Chinese bonds is not slowing down.

More surprising though, is China’s welcoming attitude towards more than just the money.

Last month we saw Blackrock get the go-ahead for a China-based fund. A business that will not only trade Chinese assets, but also be based in the nation.

An interesting move considering most US businesses are fleeing China’s shores.

Blackrock isn’t alone though.

Just this week we learnt that Citi has become the first US bank to secure a Chinese fund custody licence. Giving them the ability to trade securities and offer custody services to Chinese funds.

That is, as long as they pass a regulatory inspection later this year.

No doubt, they won’t be the last either. Because as we recently learned, China’s ‘Big Four’ banks all reported significant profit downgrades. Some of the worst results seen in over a decade.

COVID-19 was obviously a big reason for the poor showing. But, it is also because China is grappling with a long-term slowdown.

As The Economist plainly puts it:

With its current-account surplus set to fall over time, or even fall into deficit, it [China] needs to attract more foreign capital.

And it seems Wall Street is more than happy to oblige…

Rising financial power

As for why you should care about any of this, well it will likely have a dramatic impact for markets.

First and foremost, for China, it signals a stark transition in their economy.

This easing of foreign investment is (in my view) China’s only way to move beyond manufacturing. They know that they can’t rely on being the world’s factory for much longer.

Instead, like much of the West, they’re going to have to start relying more on services. And as many Western economies have proven, financial services are a major driver of economic activity.

So, by attracting Wall Street firms, China can make this transition far more seamlessly. Not only by greasing the wheels with extra capital, but also by making use of their expertise and know how.

For everyday investors, like me and you, this will hopefully mean opening up the Chinese market.

I fully expect that eventually investing in China will become as easy as investing in the US or Europe, for example.

And I know some people may scoff at that idea. Hell, I’m sure there are even investors who struggle with the idea of investing in the US or Europe as it is right now.

But, as we’ve seen in recent years, that has changed rapidly.

Apps, internet transactions, and more are making leaps and bounds. Giving everyday investors more choice than ever when it comes to investing in all kinds of asset classes and markets. Soon, China may just be the latest to join the ranks.

Whether or not investors will have an appetite for Chinese assets though, is another matter altogether. One that I won’t get into today…

But, no matter how you feel about China, you can’t ignore this change.

While most are doing their best to distance themselves from the Middle Kingdom, Wall Street is diving in headfirst. And one way or another, that should tell you that some big money may be up for grabs.


Ryan Clarkson-Ledward Signature

Ryan Clarkson-Ledward,
Editor, Money Morning

PS: Is Lithium Ready for a New Bull Run in 2020? Free report reveals three stocks that could make serious gains. Download your report now.

About Ryan Clarkson-Ledward

Ryan Clarkson-Ledward is an Editor at Money Morning.

Ryan holds degrees in both communication and international business. He helps bring Money Morning readers the latest market updates, both locally and abroad. Ryan tackles all the issues investors need to know about that the mainstream media neglects.

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