China Evolving from Capital Exporter to Capital Importer

As China evolves from capital exporter to importer, its role will change drastically within the global financial markets. Claire Dissaux, from Millennium’s Global Economics & Strategy team, explores the reasoning and ramifications of China’s evolving place in the world’s economy.

China’s integration to world trade has proceeded much more rapidly than its integration to world capital flows. With global trade no longer growing faster than world GDP over recent years and protectionist measures on the rise, the relative trend is likely to go into reverse over the coming decade in our view. We argue below that Chinese investment outflows to the rest of the world may not accelerate after their sharp increase over the past decade. In contrast, it is likely in our view that the share of China’s assets in global portfolios will rise much more sharply over the next few years. China will thereby benefit from access to a bigger pool of capital inflows while foreign investors will see diversification benefits from adding RMB debt to their portfolios. While the volatility of these foreign inflows could raise financial instability risks in China, foreign investors in local assets will need to assess the associated CNY risk. With a less solid balance-of-payment position and high private sector debt leverage, China will need a more flexible currency regime to absorb external shocks and avoid domestic financial stress. Meanwhile foreign investors in Chinese debt markets will need to manage the FX risk…

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