If you’re like most Americans who think their retirement security depends on their 401(k) or IRA planning, you’ll be surprised to learn that your retirement security in fact may depend on China’s development of capital markets and the willingness of Chinese savers to buy the stocks and bonds that baby boomers will be looking to sell in coming years.
At least that’s the opinion of some U.S. financial experts who say China’s maturing Qualified Foreign Institutional Investors (QDII) program will allow Chinese citizens over time to invest abroad in the U.S. markets.
Business professor and expert Jeremy Siegel who wrote the book "Stocks for the Long Run” told McClatchy Newspapers that the value of U.S. retiree holdings in stocks and bonds — valued by the Federal Reserve at more than $6.5 trillion — could fall by as much as 40 percent if Baby Boomers rely exclusively on domestic buyers when they sell their assets.
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According to Siegel, China, with a population of more than 1.3 billion, holds the greatest potential for U.S. boomers who are looking to transfer their assets.
"The savings and buying power of the developing countries is absolutely critical to our own welfare in the future. When all the baby boomers try to sell their assets…there are not going to be enough workers in the developed world along to absorb them. The demand that would be coming from Asia and other developing countries will be critical to support the prices of these financial assets,” Siegel added.
While China is the world’s fastest-growing large economy, it has almost no retirement plan for the hundreds of millions of workers employed in the country. It’s in the early stages of trying to create a pension system patterned after the defined-contribution model in the U.S.
China, said another expert, has a big incentive to create an effective retirement system — a report by the Center for Strategic and International Studies showed almost a third of the country’s population will be older than 60 in 2040.
Currently, China allows only some foreign mutual funds and investment companies to buy Chinese stocks and bonds. More than two dozen foreign companies are designated at Qualified Foreign Institutional Investors. To qualify, they must manage more than $10 million in securities abroad and must invest in China through Chinese banks.
McClatchy Newspapers opined that U.S. boomers’ ability to preserve the value of their financial assets "may depend on the speed with which China builds up its Qualified Domestic Institutional Investor program. "
The newspaper went on to describe the CDII program as "working like U.S. mutual funds, in which a fund manager makes investment decisions for pools of income.”
China has recently expanded its CDII program, and the program currently relaxes foreign-exchange restrictions by allowing some Chinese banks and insurance companies to convert the yuan into foreign currencies and then purchase either fixed-income assets such as bonds or foreign stocks.
One fund manager in China who in a recent interview with McClatchy Newspapers, said he believed that within a decade, Chinese investment funds may be allowed to purchase U.S. stocks and bonds. However, he added, "The QDII floodgate is going to be opened very, very slowly. I don’t foresee QDII being an overnight success nationwide, but three to five years before it reaches a critical mass.
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