Visions of Greatness (Part 4)

Can China build a great economy?

Victoria Harbor and Hong Kong skyline. Photo: Samuel Louie. Source: Wikimedia

In some ways, this seems like a foolish question. China’s economy is already huge. They’re the second largest economy in the world: $10 trillion, about half the size of the US. They’re a major player in trade, manufacturing, consumer goods, and the internet. But their stock market is tiny. They’re only 3% of global equity markets – about the size of France. And their bond market is even smaller.

Why the disconnect? Why would a world-class economy have such tiny capital markets? If the Chinese currency is ever to achieve reserve status – something they desperately want, both for the prestige and the flexibility this would afford – China must have deep and liquid debt markets for participants to add to or draw from reserves on demand.

Part of the reason is that as an export-oriented economy, the China has been able to self-fund its own development. They didn’t need external funding as they bootstrapped their economy to global growth. Also, their history with foreign capital has been problematic. Foreign loans have always been followed by foreign meddling. In addition, planning is central to China’s economic ideology. Using volatile markets to fund their initiatives seem imprudent.

But China’s markets are becoming deeper and broader. They’ve introduced several retail and institutional financial products: automated teller machines, mutual funds, options, and online payment networks, like Ant Financial. A liberalized financial sector will allow the Chinese economy to move away from centralized credit controls to a more diversified system. But this also makes booms and busts more likely.

Ant Financial logo, an affiliate of Alibaba. Source: Wikipedia

China’s immense economy is still underdeveloped. Opening their markets is an essential step for China to become a global financial leader. Investors should continue to expect major changes.

Douglas R. Tengdin, CFA

Charter Trust Company

“The Best Trust Company in New England”

By |2018-05-03T06:24:57+00:00May 3rd, 2018|Global Market Update|0 Comments

About the Author:

Mr. Tengdin is the Chief Investment Officer at Charter Trust Company and author of “The Global Market Update”. The audio version of each post can be heard on radio stations throughout New England every weekday. Mr. Tengdin graduated from Dartmouth College, Magna Cum Laude. He received his Master of Arts from Trinity Divinity School, Magna Cum Laude and received his Chartered Financial Analyst (CFA) designation in 1992. Mr. Tengdin has been managing investment portfolios for over 30 years, working for Bank of Boston, State Street Global Advisors, Citibank – Tunisia, and Banknorth Group. Throughout his career, Mr. Tengdin has emphasized helping clients manage their financial risks in difficult environments where they can profit from investing in diverse assets in diverse settings. - Leave a comment if you have any questions—I read them all! - And Follow me on Twitter @GlobalMarketUpd

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