As China Expands Investment Limits, Global Banks Get Shown Up

On closer examination, China's State Administration of Foreign Exchange (SAFE) announcement overnight that it is increasing the amount of mainland-listed A-shares foreign banks are allowed to purchase makes for wary reading.

Friday, SAFE announced that it is expanding the limits for firms eligible to participate in the qualified foreign institutional investor (QFII) program, a regulatory exemption which allows banks overseas to buy equities in Shanghai. Banks can now increase their holdings in Chinese publically-traded companies to $1 billion, from $800 billion previously. The increase amounts to a potential total of $15 billion of foreign investment.

It's long been a popularly-held belief that if only international banks were allowed to increase their stakes on the mainland, then they would. But the news of the QFII limit increase highlights how many banks are even now way under the radar of the previous limits.

Of the non-TARP funded U.S banks, none have currently reached their limits for investments in publically-traded Chinese mainland equities. Including both the bank and the asset management arm, Goldman Sachs has a total $500 million invested, JP Morgan has $150 million invested, and Morgan Stanley (again, including its asset management division) has a total of $600 million invested in Chinese A-shares, according to Bloomberg data. Citigroup, considered to be the most international U.S. bank, has $500 million invested: while a lot, it's still well below the previous $800 million limit.

In fact, of the more than 80 banks participating in the program, only one (UBS) is currently at its limit of $800 million (and may therefore have a need for the expanded $1 billion amount).

This says one of three things: 1) despite recent positive Q1 and Q2 earnings, financial institutions really don't have that much money to invest right now, 2) financial institutions are not as bullish on China as we have been led to believe, or 3) financial institutions are holding a lot of cash, waiting for a market correction in Shanghai.

Unfortunately, given the long-term nature of Chinese investments under the QFII program, the clear growth opportunities, and the fact that this seems to be a phenomenon extending to all European and Japanese banks too, I'm inclined to believe the reason is number one.

In light of all the recent bragging about international expansion plans by banks, the implication from this data is that financial services institutions are a little unrealistic about their global prospects right now.

Referring to Chinese equity prices, one trader wrote on a market note this morning: "Sell the Panda, shoot the Panda, push the Panda out of the tree." It seems you can add vultures to that list, too.