Is China a major market?
The short answer is, duh. China’s economy is huge. They’re the world’s second largest, at $12 trillion, more than half the size of the US. They’re a big player in trade, manufacturing, consumer goods, and mega construction projects. Their Belt-Road Initiative has the potential to re-draw global trade relationships. But their equity market isn’t nearly as significant. At $4 trillion, they’re a small fraction of the world’s equity markets, and less than half the size of Europe. And their debt market hardly even exits.
Why the disconnect? How can such a globally significant economy have such a tiny capital market? Because if the Chinese currency is ever to become a reserve currency, they will have to have open markets where participants can add or draw from reserves whenever they want. An active, freewheeling marketplace is the price of liquidity.
Source: Pxhere. CC0
Part of the reason is that as an export-oriented economy, the Chinese have been able to self-fund their own development. They didn’t need external funding, and their history with foreign capital has been – well – problematic. Foreign capital always comes with foreign strings, and foreign meddling.
In addition, the government’s desire to plan everything makes dependence on markets for funding capital development seem risky. How do you know they’ll be there when you need them? When a market is unregulated, you never really know what will happen next. That means the next liquidity crisis could be just around the corner.
But times are changing. China has introduced a number of financial innovations: mutual funds, ATMs, options, and they’re a leader in online payments. A liberalized financial sector will allow the Chinese economy to move away from centralized credit controls to a more diversified system. But it also makes booms and busts more likely.
China’s immense economy is still underdeveloped. Opening their markets up is the next step on the world stage. Investors should be ready.
Douglas R. Tengdin, CFA
Charter Trust Company
“The Best Trust Company in New England”