If Chinese traders enter US markets, they may bring volatility with them
- China is considering letting its citizens invest in overseas stock markets, with US exchanges a likely destination
- To some analysts, such a move could prove destabilising to markets that are already erratic
Last month, China said it was considering permitting its residents to invest in foreign securities. If allowed, any of China’s more than 170 million retail traders could, for the first time, directly invest as much as US$50,000 a year in US stocks.
To some stock investors, analysts and researchers, the prospect of even a small fraction of those millions of potential new traders coming to the US is unsettling at a time of extreme Wall Street volatility, with social media-fuelled, app-based retail trading reaching record highs.
After all, the Reddit online forum WallStreetBets earlier this year showed how violently American retail money could drive big swings in shares of GameStop, a struggling video game retailer. With new Chinese traders, a larger force of retail investors could turn the US markets into an even bigger casino.
“This idea of China allowing its citizens to all of a sudden invest in US equities, it is historical and it is likely to end up being hysterical,” said Richard Smith, chief executive of the Foundation for the Study of Cycles, a markets research firm. “It will drive the markets to even more extreme extremes than what we‘ve seen thus far.”
Beijing has not yet made its final decision, but the consideration is serious. Ye Haisheng, China’s head of capital account management at the State Administration of Foreign Exchange, said last month that easing capital controls would reduce pressure on the capital inflows caused by China’s huge trade surplus, which has led to a swift appreciation of the yuan.
China’s global trade surplus reached US$535 billion in 2020, its second-largest on record.