Thread by @michaelxpettis

According to People’s Daily, foreign purchases of Chinese bonds this year were equal to just over 1% of GDP and a little below 5% of the PBoC’s foreign exchange reserves, which implies that including foreign stock purchases (broadly comparable in...
en.people.cn/n3/2019/1225/c…

...size), foreign portfolio inflows had a far from negligible impact on domestic monetary easing. More generally, my back-of-the-envelope calculation suggests that total outstanding foreign ownership of Chinese stocks, bonds and mutual funds is equal to roughly 5-6% of GDP...

...and 20-30% of PBoC reserves.

I don't think these numbers are high enough yet to be a problem, but they are rising quickly (more than doubling in four years), so that in 2-4 years, foreign portfolio inflows could be high enough to leave China susceptible to the risk of...

...large destabilizing outflows. The dilemma Beijing faces is that it wants to avoid the tight money conditions at home that will slow credit growth and exacerbate payment difficulties next year, but without large net foreign inflows, Beijing can avoid tightening only if it...

...releases the exchange rate (which would, perversely, probably increase net outflows) or further tightens capital controls

But because destabilizing outflows can be triggered not just by domestic events, but also by external events, by relying on foreign inflows to achieve...

...domestic monetary goals Beijing may be making a very typical developing-country bet on medium-term stability in the global financial markets. Developing-country governments often make this bet on the assumption that they can manage foreign appetite for their securities by...

...rigorously implementing domestic economic policies, but even if they do, as I discuss in my 2001 book, foreign appetite is driven at least as much by uncontrollable external events as by domestic events. This could easily be a risky bet.
amazon.com/Volatility-Mac…