In the middle of the preliminaries to a global trade war, China just opened a major door to a multi-trillion-dollar finance industry opportunity—but the jury’s still out as to whether it’s going to be lucrative for American investors.
China's bilateral trade linkages with the U.S. have been growing rapidly over the years, leading to the U.S. becoming China's second largest trading partner.
U.S. information technology companies have established a large market in China, with semiconductor chip manufacturers such as Skyworks Solutions, Avago and Qorvo realizing more than 60 percent of their revenue in the Middle Kingdom.
The same can hardly be said about the U.S. financial sector. U.S. banks have the lowest direct exposure of any sector to China's $33-trillion finance industry -- all thanks to a murky regulatory structure and a capricious political landscape.
Only a sliver of the top banks' revenue comes from the country compared to more than 10-percent average by the IT industry.
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Source: U.S.-China Economic Security Review Commission
That could, however, soon change as the world's second largest economy starts to open up its finance industry to foreign players.
Beijing has removed a cap on foreign ownership in Chinese finance firms, a move that will now allow foreign investors to hold up to 51-percent interest in investment managers, securities firms and life insurance providers.
China's policymakers have been guilty of imposing highly restrictive foreign ownership rules on many of the country's sectors, a fact that is highlighted by America’s large $350-billion trade deficit in favor of China.
With minority shareholdings, U.S. investment firms have only had limited influence on big decisions leading to some like JPMorgan dialing back on their investments and joint ventures. Related: This $550 Billion Industry Is Betting On Bitcoin
China's vice minister for finance Zhu Guangyao has announced that the new rules will come into play soon, a move that has been well received by JPM chief executive Jamie Dimon, who says he's up for a second crack if his bank will be able to control business proceedings in the country.
The new rules not only offer U.S. lenders a chance to tap into a massive but underserved market but also an economy that's growing twice as fast the one back home.
Drip Feed of Credit
But probably not all U.S. investment firms will be itching for a chance to jump into the Chinese market.
Renowned short-seller and hedge fund manager Jim Chanos has declared that no American company can make money in China due to the country's growing debt problem. Chanos, who has heavily shorted U.S. companies with heavy China exposure in the past, has claimed that the country has been borrowing heavily to grow its economy--a trend that's clearly not sustainable.
Chanos' sentiments appear to be stretching the truth since companies like Apple, Boeing and General Motors have been making billions of dollars every year in China, though countless others have not been so lucky. They, however, highlight an important problem that U.S. banks will have to contend with--China's rapidly swelling debt burden. The Beijing government has been lending plenty of cash to inefficient state-owned enterprises, leading to a slew of large companies that owe their survival to a drip feed of credit and past governments that have protected them from foreign competition.
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China's total debt climbed from 141 percent of GDP in 2008 to 256 percent in 2017, too high for a middle-income country. Some 38 of 43 countries in an IMF study of economies that underwent a credit boom with credit-to-debt ratios increasing more than 30 percent in five years ended up in a financial crisis. China's has increased by 54 percent over the timespan making it hard for the economy to continue growing at a fast clip.
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Source: Bloomberg
For value investors looking for value in overheated and choppy markets though, China still offers a good opportunity.
By Alex Kimani for Safehaven.com
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