From Nikkei Asia, July 11:
Rewards for investors will fade, not increase, over time
Andrew Hunt is CEO of Hunt Economics and former advisor to Dresdner Asset Management in Asia. Ben Ashby is a former Managing Director in JPMorgan's Chief Investment Office.
What do Goldman Sachs's new wealth management joint venture with Industrial and Commercial Bank of China (ICBC) and hedge fund billionaire Ray Dalio have in common? They are both part of a galaxy of global financial investors wanting greater exposure to China's financial markets because they think the country's rise is inevitable. We think they are wrong.
We think many of the arguments Dalio made in the column "Don't be blind to China's rise in a changing world" published in the Financial Times on Oct. 23, 2020, can be proven wrong today, while others will likely be proven wrong over time. The Chinese market may well be "opening up" to foreigners, but whether it warrants more of their capital is a different matter.
At first glance, the prospect of more Chinese savings entering financial markets appears to justify this excitement as does Chinese securities becoming a bigger part of global investors' portfolios.
We calculate it would require at least $6 trillion of overseas assets, at current exchange rates, to rebalance domestic savers' deposit-heavy portfolios so that their distributions resembled those of China's neighbors. And, as Dalio pointed out in the FT, "the world is underweight Chinese stocks and bonds," which account for 3% or less of foreign portfolios rather than a "natural" weighting of closer to 15%.
So far, so factual. But many international financial institutions hope that a "normalization" of financial sector policy, a rebalancing of portfolios and continued debt-fueled growth will create a windfall that they should position themselves for now. This is where we part company: we do not expect any fundamental change in the foreseeable future because of the realities of China's economy.
Most of the country's household wealth remains tied up in bank accounts and flows abroad are tightly controlled. As a result, the banking system is vast: China's share of global deposits is roughly double its share of global gross domestic product.
The primary function of Chinese banks is to facilitate government policy, though, fostering economic development in line with the country's Communist principles. They must ensure key sectors have a ready supply of cheap credit, supporting an economy that maximizes output, not profit....
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Related, August 2:Speaking of China, Bridgewater's Ray Dalio Has Some Thoughts
