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”