China’s US$4.5 trillion flows mark tipping point in market opening

[BEIJING] “Made in China” labels have come to dominate global goods trade, much to the chagrin of US President Donald Trump, even as the nation’s financial markets remained walled off from the world.

Now, after years of tentative opening, a tipping point has been reached that may have global implications every bit as significant as China’s manufacturing revolution. For the first time, the amount of money pouring in and out of China in search of investment opportunities is exceeding the value of goods and services its trade engines generate.

A world-beating stock market rally has led the recent surge in two-way financial flows, which surged to an unprecedented US$4.5 trillion in the first seven months of the year. But it’s not just about equities – heavy trading of Chinese banks’ short-term debt and foreigners’ buying of the country’s government bonds have also contributed to the increase in cross-border money movements.

The historic shift moves China a small step closer to developed counterparts such as the US and Japan, where investment flows outnumber trade by at least 10-to-1. Such comparisons show just how much scope China has to keep opening up its capital borders, leading to a future world with more Chinese firms in top financial centres, more Shanghai-listed stocks in overseas pension funds and more yuan debt in global central banks’ reserves.

“The capital account flows will eventually dominate the overall flows in China, just as they do in other important economies in the world,” said Le Xia, chief Asia economist at Banco Bilbao Vizcaya Argentaria in Hong Kong. “The authorities will continue to open up the capital account in a measured way.”

Opening up creates a deeper pool for the offshore yuan, aiding Beijing’s long-term ambition of promoting the currency’s global usage.

Freer capital borders would also give China’s savers, with US$23 trillion stashed away in deposits, more options at a time when benchmark bond yields are hovering close to record lows, home prices are sinking and authorities are worried the local stock market rally risks turning into a bubble.

“China will keep opening its markets, which will increase flows under the capital account, boost the yuan’s international status and produce more diversified opportunities for investors,” said Ding Shuang, chief economist for greater China and north Asia at Standard Chartered. “That said, the authorities will be cautious as they won’t want to see disorderly capitals flows.”

Unprecedented flows

Transfers under China’s financial account, which covers money movements made for securities and direct investments, are running at an average 17 per cent higher each month than last year, according to Bloomberg’s calculations based on official figures to July. If that pace is sustained, such flows are poised to surpass transfers recorded under the current account, or those made to facilitate international trade, on a yearly basis for the first time, the data showed.

SEE ALSO

Driving the jump is a spike in cross-border flows to buy or sell onshore and overseas securities such as equities and bonds. The monthly average of such transfers to July is nearly a quarter higher than in 2024 and triple the amount of five years ago.

China dramatically tightened its capital controls when a shock devaluation of the yuan a decade ago triggered the worst fund exodus in its history and cost the central bank more than half a trillion US dollars of foreign reserves to restore investor confidence. Since then, keeping the currency steady has been one of Beijing’s top priorities.

That’s why China has been proceeding with opening up the onshore markets in a gradual and carefully orchestrated pace, even though it has long been on the policy agenda. Over the past decade, authorities have removed most hurdles for overseas investors to buy onshore debt and created channels for locals to purchase Hong Kong-listed stocks, bonds and wealth management products.

But it’s been a case of two steps forward, one step back. Beijing slowed the pace of liberalisation again when it was busy fighting the first round of its trade war with the US in 2018 to 2020 and then as it controlled the Covid-19 outbreak.

Now, momentum towards opening up appears to be picking up again.

Beijing is looking to capitalise as global investors shift from the US dollar amid the Trump administration’s chaotic tariff campaign and deteriorating budget position. In recent months, policymakers have eased capital controls, launched a payment system with Hong Kong and disclosed plans for some local investors to put more money into overseas assets.

Since July, mainland investors have stepped up purchases of Hong Kong stocks, which soared on bets China’s stimulus will pull the economy out of deflation and trade tensions will ease. A pickup in inflows into Shanghai equities has also contributed to transfers under the financial account.

Earlier this year, the flows were fuelled by overseas funds repatriating profits made on carry investments in Chinese banks’ short-dated debt after the strategy became less lucrative.

Openness and transparency

Still, constraints remain. Authorities control most outflows channels with a quota system, such as the one that allows qualified onshore institutions to invest in offshore assets. Residents can only buy US$50,000 of foreign-exchange per year without regulatory approval.

Foreign funds are also hesitant to invest more heavily in China due to an uncertain outlook for the economy and its large interest-rate discount to the US.

“China’s capital markets will be boosted and enhanced only if there is openness and transparency,” said George Magnus, research associate at Oxford University’s China Centre and formerly chief economist at UBS. That includes “the lifting of capital controls, a more benign operating environment for foreign firms in China and significant reforms to currency management”.

Goldman Sachs analysts are among those who see more scope for China’s currency to play a bigger role on the global stage at a time of escalating geopolitical tensions.

“China’s rising manufacturing power and ongoing geopolitical shifts introduce fresh opportunities for yuan internationalisation,” Goldman economists Hui Shan and Chelsea Song wrote in a recent note. “One old challenge is the balance between Chinese policymakers’ desire for more controls and foreign corporations’ and investors’ preferences for more openness, transparency and predictability.” BLOOMBERG