China: Reallocating US Equity Investments

Published on October 25, 2018

China’s President Xi Jinping and US President Donald J. Trump have finally agreed, formally, to meet on the sidelines of the G-20 summit in Buenos Aires on November 20.

But senior diplomats from both sides confirm they have not held any discussion of substance yet over the potential content or objectives of the summit (see SGH 10/12/18, “China: Low Expectations for Summit”), and as both sides have already since gone well out of their way to throw cold water on the meeting, Chinese sources maintain bi-lateral communications have remained, at least for now, at no higher than the Vice-Ministerial level.

*** With low expectations for any significant near-term progress on trade, and with continued and intense pressure on their domestic markets, the major Chinese official financial institutions have, from what we understand, taken significant steps to push for the re-allocation of Chinese investments away from the US, and back into the Chinese domestic market. ***

*** According to a joint notice from the Ministry of Finance, the Central Bank (PBoC), and the FX Administrator (SAFE), China’s state owned financial institutions are said, according to Chinese sources, to have been “starting to” sell (US) stocks. We read this to clearly mean these SOEs have been “encouraged,” or “directed” to sell US stocks. ***

*** Indeed, lest that nuance be lost, the notice, from what we are told, explains that due to the current high (“too high”) valuations in developed markets, and (perhaps more to the point), due to the conversely “too low” valuations in domestic markets, in order to prevent overseas investment losses and to stabilize the domestic stock market, the country’s state-owned financial institutions “should” review and adjust their investment plans: selling overseas stocks, especially US stocks, and increasing their shares in the domestic stock markets, especially in Hong Kong – as soon as possible. ***

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