Can China boost foreign asset returns to ease impact of economic slowdown?

Allowing citizens to invest more internationally could boost their savings returns, says former overseer of international payments

China’s draconian capital controls let individuals convert up to US$50,000 annually, but only for travel and study, not for investment

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A former official under China’s State Administration of Foreign Exchange said national policymakers may want to encourage citizens to generate higher investment returns abroad. Photo: AP

Karen Yeungin Hong KongandFrank Tangin Beijing

Published: 10:15pm, 18 Aug 2021Updated: 12:30am, 19 Aug 2021

China’s dire demographic situation should help convince policymakers to further open up its capital account to allow citizens to invest more internationally, thereby helping boost the returns of the nation’s massive savings, according to a former director of international payments under China’s State Administration of Foreign Exchange (SAFE).

China’s foreign exchange reserves currently account for most of its foreign assets and are mainly invested in low-yield US Treasury securities. Chinese households, meanwhile, have a much lower exposure to global assets compared with their peers in developed countries.

In that respect, Guan Tao, the former division director at SAFE who is now chief economist at BOC International, said national policymakers may want to encourage citizens to generate higher investment returns abroad. This, he said, could help hedge against the imminent structural change to China’s current account that makes it a capital importer – buying more from the rest of the world than selling to it.

Guan was speaking during a webinar hosted by the Hong Kong Institute for Monetary and Financial Research on Tuesday.

“In the long run, we hope there will be more liberalisation to allow Chinese citizens to increase their asset allocations [in global markets], and to help them better respond to the advent of [China’s] current account turning into a deficit from a surplus because of an ageing population,” he said.

A country’s current account represents its net income over a period, whereas the capital account records the net flow of investments into the economy during a given year.

“If we liberalise markets now, it is possible that – like Japan, which took its money out early on – our overseas investment allocations will also generate returns, and we will have more capacity to make up for the current account deficit,” Guan added.

The country’s holdings of foreign currency generated an annual average return of 3.68 per cent from 2005 to 2014, according to the latest official data. The share of US dollar-denominated assets among China’s total foreign exchange reserves declined from 79 per cent in 2005 to 58 per cent by the end of 2014 as the government diversified its foreign assets away from low-return US Treasury securities.

Because of China’s draconian capital controls, individuals are currently allowed to convert up to US$50,000 annually, but only for travel and study, not for investment.