Thursday, 14 August 2008

It Ain't Just Sports China is Good At

As we watch the Chinese pile up the medals in the Olympics, possibly displacing the USA as the top dog in the sports world, we might also note China's rise in capital markets.

This past January, the McKinsey Global Institute published its 4th annual report on Global Capital Markets and the results are amazing. (The report shows 2006 figures, so things are no doubt different today but it's the best available data.)

Maybe China isn't so democratic but it sure is becoming a capitalist country. In 2006 it ranked second, on a par with all of the Eurozone, in equity issuance and was not too far behind the USA - see this chart.

There has been a massive shift from bank deposits to equity investments in China. In 2004, equity made up only 15% of total capital in China while bank deposits were 72%. A mere two years later, equity had gone up to 30% of the total - see this chart.

And its total financial assets had climbed from a tenth that of the USA to a seventh. That's a huge shift in such a short time.

Last but not least, with their new found wealth, the Chinese are going global shopping, investing their capital in other countries and becoming the world's largest net exporter of capital in 2006. Who knows, they might get a liking for sports teams and buy the Oilers soon, though it's more likely they'll buy the oil sands. Oops, they tried that, didn't like Canada's response and have already pulled out, heading instead for Venezuela.

My investment take-aways:
1) It seems that the action and the growth for investors is coming mainly from places beyond our traditional comfort zone of North America and Europe.

2) However, the report is also interesting as confirmation of the degree of the increasing integration of world capital markets. I believe that means we can expect continuing high correlation of stock market returns across international, making international diversification less viable for an investor.

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