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| +Sara Hsu |
Sara Hsu:
Outbound financial investment, while minimal today, is also on the table. The Asia Financial Risk Think Tank based in Hong Kong SAR, for example, is in the process of documenting ways in which China may consider outbound foreign financial investment. Strict capital controls continue to block outbound foreign financial investment, but the potential for the development of foreign financial investment is vast, and China’s institutional and retail investors alike can benefit from diversifying assets abroad. Allowing capital outflows for the purpose of financial investment is currently under discussion. Precedents for outbound financial investment from China are few, but include China’s sovereign wealth funds. The China Investment Corporation (CIC) has been most visible in this area, investing in a number of foreign assets. Controlled by the Ministry of Finance, CIC is registered as an independent non-bank state-owned enterprise, unlike other sovereign wealth funds. Although a recent audit revealed losses due to investment in firms such as Blackstone and Morgan Stanley, CIC has learned from its experience and continues to obtain returns abroad. An aggressive strategy implemented in the early years of its operation has been modified to a more moderate strategy based on investment in equities and other assets rather than high-yield assets purchased via absolute return vehicles such as hedge funds.
The CIC case may increase the incentive to first open overseas financial investment to state-owned banks rather than non-bank state-owned enterprises, as state-owned banks may undergo emergency liquidity injections where necessary. State-owned banks are under the purview of the People’s Bank of China. In addition, the CIC case illustrates the danger in taking an aggressive financial position, particularly given low levels of experience in investing abroad. It also shines a light on the need to ensure adequate management and accounting procedures.
Consideration of outbound financial investment comes at a time when China’s leadership is attempting to further marketize its financial sector, enhancing returns and other market signals. Overseas financial investment is a wide open field that has the potential to provide risk diversification and returns to institutional and retail investors, if managed properly. Like overseas direct investment, overseas financial investment may play an important role in providing China with much-needed resources (in the latter case, financial) to expand economic growth.More in the Diplomat.
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