Emerging markets, particularly China, have been beset by liquidity inflows due to ultra-easy monetary policies and slow growth in places such as the U.S., Europe, and Japan.
China, especially, appears to provide higher returns for capital due to factors such as the potential for yuan appreciation, higher interest rates, and higher economic growth.
Thus China is a magnet for capital right now, with Shanghai Securities Journal even reporting that as much as 650 billion Hong Kong dollars are sitting in Hong Kong trying to find a way to get into the mainland.
While inflows of capital into developing countries pose inflationary threats, which is a key reason why developing nations are so worried about them, one way to deal with this liquidity is to take incoming capital and then invest it.
Singapore, for example, is trying to maintain its status as an open financial hub, thus has refrained from implementing capital controls or penalties in response to incoming liquidity, instead opting to direct the flow of capital into investment projects abroad.
China hasn’t been as adept at managing such a redirection of incoming capital, but its state-owned entities (SOEs) are now preparing for global M&A of their own. The plan is to take advantage of all the money being thrown at China and use it to buy foreign companies and assets. This should help reduce the inflationary effects of incoming capital deluging the domestic economy.
Moreover, even if the Chinese government tries to restrict bank lending to SOEs, these Chinese companies are now planning to simply tap global bond investors, who are willing to loan money to them for dirt cheap interest rates thanks to historically low U.S. bond yields. They’ll use it to buy assets abroad:
“Every major company is on a shopping spree,” said Steve Wang, head of fixed-income research at BOCI Securities Ltd. “They want to acquire assets overseas when the dollar is still low and the yuan is strengthening,” he said, identifying CNOOC Ltd, China Petroleum & Chemical Corp, and China Cosco Holdings Co as potential bond issuers.
“State-owned companies’ balance sheets are weighted towards short-term debt provided by Chinese banks, so some are looking to the overseas bond market for longer-term funds,” Ronald Tang Wai-Hung, a director of China capital markets origination at Citigroup Inc, said at a conference in Beijing on Nov 17.
More of China’s companies will “start to look to access cheap dollar funding, because over the last 10 years Treasury rates have never been so low,” said Guy Wylie, head of Asian debt capital markets at UBS.
This is the smart way for China to deal with its liquidity problems — Use cheap incoming money to go on a global shopping spree. It’s sort of like what the U.S. has been incentivized to do over the last few decades, and as such the tables have now turned.
While obviously the U.S. took this game 10 steps too far, if done properly, say by investing in natural resources or businesses rather than disposable consumer goods and wars, then cheap foreign credit is actually a great deal.