The attraction of party invitations is relative. The more exclusive the event, the better. China is easing the path for foreign investment flows into the Shanghai stock market. But foreign investors run the risk of turning up to the party only to find that others are already leaving for a more exciting one elsewhere.
China is to allow renminbi held offshore to be used to buy Chinese stocks; it is reportedly planning to ease restrictions on foreign institutions’ direct involvement in China’s markets. Foreign fund investments currently count for only about 1 per cent of China’s market value. This passes the exclusivity test. However, there are signs that some of this may already be leaving. China has just recorded two successive months of net selling of renminbi by its banks, implying capital outflows. At Rmb53bn ($8.3bn) in the last two months, the flows are small (monthly gains have averaged Rmb262bn in the past year), but only a single month in the past six years had previously registered any fall. The pace of the renminbi’s gains has slowed recently and movements in its nascent offshore market, previously roaring ahead, have become more turbulent.
The main reason however, for China’s newly friendly stance toward foreign investment is not currency weakness but the poor health of its stock market. The Shanghai Composite has fallen 22 per cent this year, compared with a 15 per cent drop in Seoul and 18 per cent in Tokyo. Official institutions have been propping up the ailing market.