China to Let Banks Buy Stocks Overseas for First Time

[renewable]

Bloomberg article: China to Let Banks Buy Stocks Overseas for First Time

China will let its banks buy shares overseas for the first time, diverting some of the country's 35 trillion yuan ($4.6 trillion) of savings from a local stock market where trading has surged sevenfold.

Commercial banks can invest as much as 50 percent of funds in the qualified domestic institutional investors program, or QDII, in overseas stock markets, the China Banking Regulatory Commission said on its Web site today. Investors need at least 300,000 yuan to buy such financial products, the regulator said.

Why are the Chinese doing this now - to both cool off domestic markets and convert their currency reserves? What are they going to buy? Won't this stave off any 'ka' in equities?

[jk]

Re: China to Let Banks Buy Stocks Overseas for First Time

Why are the Chinese doing this now - to both cool off domestic markets and convert their currency reserves? What are they going to buy? Won't this stave off any 'ka' in equities?

the chinese have already raised banks reserve requirements several times and not succeeded in cooling off their stock market bubble. allowing investment in overseas equities should siphon off a lot of the demand that is now being channeled to the shanghia market. as the article to which you link says, hong kong is likely to be the first beneficiary, but the money should spread out from there. in order to allow the qdii's to invest abroad, the pboc must be making the yuan convertible for these entities. that is, they must be able to sell their yuan to the pboc in exchange for foreign currencies to use in making purchases of equities abroad. this is a step towards real convertibility for the yuan, and a loosening of capital controls.

this does raise the very question you asked: will this stave off a deflation-scare sell-off in equities? if the buying is big enough, i suppose it might. certainly it adds to current demand for equities [outside shanghai], and the STORY is a great addition to the bull story pushing up stocks. at the same time, and to exactly the same dollar total, this will reduce the pboc's demand for, e.g., treasuries, pushing up rates. so i, for one, don't know the answer to your question.

[friendly_jacek]

Re: China to Let Banks Buy Stocks Overseas for First Time

the chinese have already raised banks reserve requirements several times and not succeeded in cooling off their stock market bubble. allowing investment in overseas equities should siphon off a lot of the demand that is now being channeled to the shanghia market. as the article to which you link says, hong kong is likely to be the first beneficiary, but the money should spread out from there. in order to allow the qdii's to invest abroad, the pboc must be making the yuan convertible for these entities. that is, they must be able to sell their yuan to the pboc in exchange for foreign currencies to use in making purchases of equities abroad. this is a step towards real convertibility for the yuan, and a loosening of capital controls.

this does raise the very question you asked: will this stave off a deflation-scare sell-off in equities? if the buying is big enough, i suppose it might. certainly it adds to current demand for equities [outside shanghai], and the STORY is a great addition to the bull story pushing up stocks. at the same time, and to exactly the same dollar total, this will reduce the pboc's demand for, e.g., treasuries, pushing up rates. so i, for one, don't know the answer to your question.

This is so funny, I was just about to post about it.
This together with the diversification of China's foreign reserve to include equities could easily explain the recent story in equities. This adds to the overall liquidity.

Mental note to myself: buy to cover on Monday.

[flow5]

Re: China to Let Banks Buy Stocks Overseas for First Time

I ran across an article worth reading:
The Shanghai Stock Index Bubble

http://china.seekingalpha.com/article/30907

Gary Dorsch (Global Money Trends) submits: “Free markets for Free men”, was a slogan etched on the floor jackets of several traders at the Chicago Mercantile Exchange in the 1980’s. But today, the slogan for traders is “Rigged markets for Central bankers,” who try to move currency and stock markets with their control of the money spigots and timely “jawboning” to the media outlets, when markets become unruly. Today, trading in currencies, precious metals, and stock market indexes has turned into a game of central bank watching.

[bill]

Re: China to Let Banks Buy Stocks Overseas for First Time

Notice of the Adjustments to the Offshore Investment Scope of Overseas Wealth Management Business of Commercial Banks on behalf of Their Clients
(promulgated on May 10, 2007)

http://www.cbrc.gov.cn/english/home/...E563AD79AEB000

From the CBRC, for the record