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The Determinants of China’s International Portfolio Equity Allocations

Author

Listed:
  • Isha Agarwal

    (University of British Columbia)

  • Grace Weishi Gu

    (University of California, Santa Cruz)

  • Eswar Prasad

    (Cornell University
    Brookings Institution
    NBER)

Abstract

We analyze shifts in the structure of China’s capital outflows over the past decade. The composition of gross outflows has shifted from accumulation of foreign exchange reserves by the central bank to non-official outflows. Unlocking the enormous pool of domestic savings could have a significant impact on global financial markets as China continues to open up its capital account and as domestic investors look abroad for returns and diversification. We analyze in detail the allocation patterns of Chinese institutional investors (IIs), which constitute the main channel for foreign portfolio investment outflows. We find that, relative to benchmarks based on market capitalization, Chinese IIs underweight developed countries and high-tech sectors, respectively, in their international portfolio allocations but overinvest in high-tech stocks in developed countries. To further examine Chinese IIs’ joint decisions on destination country–sector pairs, we construct continuous measures of revealed comparative advantage and disadvantage in a sector for a country based on trade patterns. We find that, in their foreign portfolio allocations, Chinese IIs overweight sectors in which China has a comparative disadvantage. Moreover, Chinese IIs concentrate such investments in countries that have higher comparative advantage in those sectors. Diversification and information advantages related to foreign imports to China seem to influence patterns of foreign portfolio allocations, while yield-seeking and learning motives do not.

Suggested Citation

  • Isha Agarwal & Grace Weishi Gu & Eswar Prasad, 2020. "The Determinants of China’s International Portfolio Equity Allocations," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 68(3), pages 643-692, September.
    • Handle: RePEc:pal:imfecr:v:68:y:2020:i:3:d:10.1057_s41308-020-00113-5
    DOI: 10.1057/s41308-020-00113-5
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    More about this item

    JEL classification:

    • F2 - International Economics - - International Factor Movements and International Business
    • F3 - International Economics - - International Finance
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance

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