China’s recent capital account reforms have earned plaudits around the world, especially the unprecedented steps taken permitting foreigners to take controlling interests in Chinese securities firms, insurance companies, asset managers and futures traders.
But not everyone is convinced that the reforms comprise necessarily positive signals for global investors. China’s economy has been slowing for years, due largely to a range of structural dynamics, including an “aging population, rising labor costs and peak coal production.” Collectively, these dynamics increase prospects for a potential stock market crash, or worse. So the country arguably could use some capital:
Western capital might be just the dumb money that China’s strained financial firms need. With stocks, real estate and basically every other asset in the rich world looking expensive, developed-country investors are desperate for some yield. China, with its huge market and still-rapid growth, is always a tempting bet, but especially so now that there are few good investment options.
A rush of foreign investment into Chinese finance companies would certainly help cushion them against any burst housing bubble, liquidity crisis or wave of corporate bankruptcies. The Chinese government would still have to do plenty of bailouts, but now foreign banks would share much of the pain. Like the European banks that invested in U.S. housing-backed bonds before the 2008 crisis, Western investors might get fooled into buying at the top.
The opinion piece by Bloomberg can be found here.