BNP Paribas AM: Will the US squeeze inflows into Chinese assets?

If the White House limits US public pension fund holdings of Chinese assets, it could affect global trade and finance. In short, it could backfire.
  • Effect on Chinese equities and the renminbi would likely be minor
  • Restriction on holdings could impede Sino-US trade negotiations and add to currency war risk
  • Possible fragmentation of the global financial system and technology linkages

Media reports have suggested the White House is considering restricting US public pension fund holdings of Chinese assets.

A drop in US access to Chinese stocks at a time when those stocks are being included in international benchmarks would reduce total portfolio inflows to China, weakening support for the renminbi just when market sentiment is already negative due to global concerns over China’s domestic growth and the Sino-US trade war.

The market impact

Foreigners hold only 3% of China’s A-share market in terms of capitalisation. Some brokers estimate that US public pension funds hold USD 5-8 billion of A-shares, which equates to less than 0.3% of China’s currency reserves. Therefore, any reversal of inflows from US portfolios would have a minor impact on Chinese equities and the renminbi.

If offshore Chinese stocks are included, US pension funds hold another USD 55-92 billion of such shares. Their holdings of onshore and offshore combined equate to 3.5-6.0% of the MSCI China index, according to some market estimates.

Read the full analysis by BNPP AM’s senior China economist on the possible adverse effects on global trade, finance and technology should the US limit pension fund holdings of Chinese assets.