China’s outbound flow of capital is reason for optimism on the part of investors, not concern, Bloomberg points out today for some very compelling reasons. Although, for China’s economic competitors, it may be cause for concern.
- China’s deal activity used to focus on securing commodities, but now securing brands and patents is the main driver behind acquisitions.
- The acquisitions help deflate bubbles at home. Restrictions to curb outflows risk creating bubbles, with investors left with no choice but to try their hand in domestic equities markets, distorting valuations.
- The period of yuan depreciation also forced companies to pay down dollar debt – usually a key risk for emerging economies – in advance of the yuan falling further.
The sluggish US economy also bodes well, as the Fed will be forced to take it slower on rate hike. More substantial rate hikes would test this optimistic theory.