Sunday, October 7, 2012

Chinese entrepreneurs' personal outbbound investments and their impact on the chinese banking system

Chinese have become the second largest group of foreign buyers of real estate in the US behind Canadians. A survey by the Hurun Report and consultancy Bain & Co last year showed that 60% of the 960,000 Chinese with assets of more than RMB10 million are considering emigrating or have already begun the process.

China’s super-rich own a huge proportion of the country’s wealth: the top 1% controls 70% of the country’s financial assets (Boston Consulting Group). They are also best positioned to find means to circumvent the country’s tight controls on the export of capital. This could be good for China and the world, but also presents the risk of draining liquidity from the country at a time when China may need it most.

By investing in other countries, China can help foster economic growth that allows foreign consumers to buy Chinese products again. It could also help reverse the trade imbalances that have led the US and the EU to take on more debt than their economies can sustain.

But a kind of "capital flight" is almost always very destabilizing. So, there are certain risks involved in those Chinese entrepreneurs' personal outbound investments (total capital outflows reached US$168 billion in the past year) specially since, as capital inflows subside, so will the ready supply of cash that the banking system has been used to.

Data already shows growth in China’s forex reserves slowing: they expanded only US$63.6 billion in the first six months of the year, down 77% from the first half of 2011. If this situation persists, liquidity will be drained out of the system just as other demands on bank capital are growing. As banks choose to roll over existing loans rather than classify them as non-performing loans, they are required to spend a greater proportion of their capital on servicing debt, while Beijing is calling on banks to increase their lending to stimulate the economy. In this framework, the impact of Chinese entrepreneurs' personal outbound investments on the Chinese banking system may end being bigger than originally expected.

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