[SHANGHAI] It has taken a slump in the property market, a white-knuckle ride on local shares and a currency devaluation, but China's retail investors are finally taking a serious look at overseas stocks and bonds.
That is music to the ears of foreign brokers and wealth managers and to local entrepreneurs who can make a profit on their coat tails, for the sums involved could be vast.
Investment bank CICC says China's high net-worth individuals control US$4.4 trillion in assets, but allocate only 5 per cent of their wealth overseas, compared with a global average of 24 per cent, and ordinary middle-class savers hold further trillions on deposit in Chinese banks.
If both groups reallocate their assets in line with global norms, some fund managers say as much as US$6 trillion of Chinese money could find its way into overseas stock and bonds.
Money is already leaving China, especially after a summer stock market crash and August's devaluation of the yuan. In November China's foreign exchange reserves drained by their third-sharpest rate ever to their lowest level since early 2013.
Official figures don't distinguish between retail and institutional investment, but Chinese purchases of offshore debt and equities rose a hefty 11 per cent in the second quarter.
And they don't capture reallocations from existing offshore portfolios including real estate, home to many billions of dollars of Chinese money.
Domestic fund managers say growing interest in a scheme that lets local mutual funds invest in offshore assets is revealing.
The Qualified Domestic Institutional Investor (QDII) scheme had failed for years to attract much interest from Chinese until this year, when institutions started bidding up the price of the scheme's investment quotas traded between them. "QDII quota suddenly became very expensive this year," said Shen Weizheng, fund manager at Shanghai-based Ivy Capital, who plans to launch a Hong Kong bond fund to meet rising demand for overseas assets from mainland clients. "Domestic capital is rushing out as the yuan is no longer firm," he added.
David Friedland, manager of Asia Pacific operations for trading platform Interactive Brokers, which has offices in Hong Kong and China, said increasingly sophisticated Chinese investors were looking overseas. "We're seeing a good chunk of interest. People can't just put all their money into apartments," he said.
Brian Qian, a 33-year-old risk controller at a Chinese bank, fits the profile of this new breed of investors.
He said he had invested several million yuan, half his investable wealth, into overseas stocks and bonds this year. "Investment returns in China are much lower than previously," he said, and he no longer trusted the local stock markets after the summer crash, nor China's risky high-yield wealth management products (WMP). "From my perspective, there's a relatively big bubble in China's real economy," he added.
A middle-class Shanghai investor who gave her surname as Zhang said she, too, was looking at dollar assets. "A financial crisis is coming to China, and the currency is going to depreciate. It is not safe to give my money to Chinese banks or asset management products any more." This growing distaste for local assets, beset with bubbles, market distortions and shadowy underground banking products, is balanced by steadier returns from overseas markets.
The S&P 500 index of big US shares is up 35 per cent from its peak before the global financial crisis, while the Shanghai Composite Index is still down over 40 per cent.
Chinese businesses are gearing up to help those looking to make the switch in what Dacheng Fund Management Co calls the "trend of the next decade".
It is building a dedicated investment team to help Chinese invest overseas.
Former Wall Street trader Liu Zhen is now CEO of Clipper Advisors, a software start-up whose Blue Sea Wealth cellphone app is specifically tailored to help Chinese investors navigate offshore exchange-traded funds, reallocating according to risk tolerance and goals. "For every Chinese person there are two pockets, one with dollars, one with renminbi," he said.
The problem for many such investors is not working out what to invest in but how.
Officially, there is a US$50,000 annual limit on individuals'moving money out of China, though many have found ways round that to invest in overseas property.
Wary of the economic impact of outflows when growth is slowing, Beijing has been making it harder to get money out, freezing further QDII quota approvals since March and suspending applications for a yuan-denominated version of the scheme as recently as Wednesday.
That's a headache for people like Liu Haiying, Chairman of Haiying (Shanghai) Investment Consulting Co. "I have a plan to launch a global macro hedge fund to invest in global financial assets," said Liu. "There's huge demand for such products. The biggest obstacle now is how to move the money out."