© Norman Chan
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The US keeps attracting portfolio investment from foreign investors because of two major reasons. First of all, a gradual, but sustainable growth acceleration in its domestic economy, and second – a lack of inflation pressure, to allow the Federal Reserve to maintain a highly accommodating monetary policy in the nearest future. Although the Fed is prepared to hike rate for the first time in about 8-9 years, the normalization of interest rate is going to be very mild and gradual next year. On the other hand, domestic recovery momentum is robust, and starts to lift earnings growth in the US. However, the US economy is still not recovering fully, which means there is further room to grow and it is nowhere near the cycle peak yet. Valuations are no longer dirt cheap, but still reasonably attractive, especially in case the economic recovery speeds up in the next 12 to 18 months. As a result, the US market is still the most promising among major developed markets.
The figures released recently also showed China and Japan, the two largest foreign holders of Treasuries, reduced their stockpiles in September. China's holdings dropped $3.4 billion to $1.27 trillion, while Japan's fell $9 billion to $1.22 trillion, the data showed. Taking into account the present economic condition of both countries were these indicators in line with expectations, and what tendency do you anticipate to see from China and Japan in terms of investment in US?
Needless to say, both China and Japan's holdings of US Treasuries are declining, but would be worth mentioning that it happens at a very slow pace. However, both countries probably have had too much exposure to start off with, and it is natural that they do not want to keep building up it further from US $1.2 trillion levels. Moreover, in the long run, the US Treasuries are too expensive to buy or even hold and, hence, it is quite reasonable for any holder to trim their holding. To my mind, it is a clear trend to diversify one's holding from US Treasury to more "efficient" asset class, such as real asset to produce a better long-term return.
This fall of treasuries holding by the US and China does not represent a long-term decline in US investment, as they would try shift further from the "boring" bonds to a more rewarding investment. In the long term, US is still a relatively attractive market for both countries but it may be in other form such as equity or direct business investment.
China and the US pledged to exchange by early 2015 "negative lists" of sectors closed to foreign investment, with the implication of unrestricted investment in other areas. This would open up Chinese sectors to US investors and presumably other foreign capital in due course. To your mind, which sectors currently would be the most important for the US to direct cash flow into China?
It is hard to say exactly, however, to my mind, like any other foreign country, the United States would be interested in many different sectors in China. Talking more broadly, I believe that Internet, e-commerce, healthcare and other social services are likely to be top candidates that investors would be interested in.