In my view, portfolio flows in the opposite direction – i.e. portfolio outflows from Mainland China – will also present huge  BIS central bankers’ speeches  1  opportunities to the asset management industry, especially given the fact that the Mainland economy is the single largest provider of savings in the world. Currently, outward portfolio investment (OPI) from the Mainland is only around 5% of its GDP, still far below 57% for East Asia, 42% for the US and over 100% for the UK. Our inhouse research findings show that an economy’s portfolio investment outflows as a percentage of GDP tend to grow along with the level of economic development measured by per capita GDP. So, given the huge potential outward portfolio investments from Mainland China, how will they be allocated across different financial markets? Our researchers have studied this particular subject in depth and found that the home bias is still very much there, i.e. the closer the potential investment destination to Mainland China, the more OPIs it will receive from Mainland China. As such, Hong Kong is likely to be one of the key destinations of Mainland’s OPIs and the amount of those OPIs Hong Kong will receive will increase as China’s GDP grows. Apart from being the final destination for these investments, Hong Kong can also act as an ideal launch platform for these investment flows to reach other major global markets.
Lower interest rates have encouraged risk-taking and higher leverage as investors have wanted to secure high rates of return. A case in point is insurance companies, which have to service guaranteed rates of return, and pension funds that have agreed to specific benefits. As the return on risk free bonds has declined, investors have been increasingly led to search for yield and increase the share of risky assets, including credit derivatives, in their portfolios. This contributes to the compression of risk premia. This can continue as long as long-term interest rates stay low. But there is some circularity in the situation. On the one hand, institutional investors are “victims” of low long-term interest rates. On the other hand, they help to maintain this situation as they continue to look for even longer-dated bonds. Therefore, if the pricing of long-term government bonds, which is the reference for the pricing of many other assets, remains distorted, credit risk premia may be based on shaky foundations. Second, risk transfer mechanisms contribute to a certain opacity in the distribution of risks. Most transactions are conducted on OTC markets and are not recorded in a centralised manner: there is therefore a “knowledge gap” in the financial system as regards CRT exposures. More fundamentally, risks are usually transferred by banks, which are regulated and transparent, to entities that are unregulated and are not required to disclose their positions. It is therefore impossible for market participants and regulators to identity the situation of the ultimate risk holders.