Morgan Stanley Sees $400 Billion China Inflows Over Five Years

Yuan liberalization and the opening up of China’s capital account are likely to attract $400 billion of overseas funds to the nation’s stocks and bonds over the next five years, Morgan Stanley estimates.

In the most optimistic scenario, inflows could exceed $1.2 trillion if its markets are fully open, analysts led by Serena Tang wrote in a June 11 research note. A loosening of restrictions could also lead to almost $6 billion of annual outflows as domestic investors diversify their holdings, while funds moving in and out of the country may increase yuan volatility, they said.

China is easing capital controls as it pushes for the International Monetary Fund to include the yuan in its basket of reserve currencies at a five-yearly review in October. Freer access to the nation’s financial markets will lead to the nation’s assets being included in global benchmarks tracked by fund managers.

New York-based equity index compiler MSCI Inc. this week deferred a decision on including yuan-denominated stocks in an emerging-market gauge, citing investor concerns such as accessibility and capital mobility. The potential initial weighting of Chinese shares in MSCI’s index would be about 1 percent, which would bring $3 billion-$5 billion of inflows, according to Morgan Stanley. That into bonds will be about $3 billion at the first stage.

The People’s Bank of China last week opened an interbank repurchase market to approved foreign lenders and said it will start a cross-border payment system for the yuan by the end of the year. Although China’s reforms will bolster the yuan’s case, inclusion in the IMF’s reserve’s basket will be “difficult” to achieve this year unless the agency is more flexible with its criteria, according to Morgan Stanley.