Are we about to see a great wall of Chinese money slam into the world's equity markets?
The Chinese authorities have announced that for the first time, citizens will be permitted to own foreign shares. Given the nerve-shredding gyrations on Western stock markets, that sounds like a good idea. Millions of enthusiastic Chinese share buyers would be very helpful right now, underpinning stock exchanges weakened by our own flight from riskier assets.
It will happen, although it seems, in typical Chinese style, to be something that will evolve slowly rather than burst forth upon the international scene with all the impact of a brightly decorated dancing dragon in a Chinese new year festival. However the longer-term effects will be as dramatic, and, as they say over there, even the longest journey starts with a single step.
The beginnings are modest enough. China's currency regulator, the State Administration of Foreign Exchange, has announced that Chinese citizens with a Bank of China account in the northern city of Tianjin will be allowed to invest in foreign equities under a pilot scheme. The regulator didn't specify an investment maximum, and nor did they say when the trial will start. Purchases will be limited to Hong Kong-listed shares, mostly firmly centred on the Hong Kong/Chinese economy but with a sprinkling of stocks that also offer a wider exposure to the world, such as HSBC and Standard Chartered.
Tianjin seems to have been chosen because the people's government wants to build the region up as another economic hub.
Since 1990 the Chinese have had stock markets in Shanghai and Shenzhen, and China allowed selected banks and brokerages to start investing overseas last year under the "qualified domestic institutional investor" programme. So this new step isn't revolutionary in an ideological sense. However, not since the foundation of the People's Republic in 1949 has such activity been sanctioned, and it marks a milestone in the internationalisation and the normalisation of the Chinese economy. Economic xenophobia, so violently absolute in the Mao era, is finally drawing to an end.
"It's one of the ways to provide some cooling to the local market because so much liquidity has been trapped within the system with no outlet,'' said Tai Hui, an economist at Standard Chartered Bank in Hong Kong. "In terms of the outlook for Hong Kong's market, that's going to be attractive.''
And traders there didn't need convincing about the importance of this move. The Hang Seng has seen successive record highs this week, buoyed by the expectation of a Chinese shopping spree.
So how big will the impact be? The potential is dizzying. The Chinese, thanks to rapid economic growth and rising wages, have amassed some 17 trillion yuan (£1.1trillion) in household savings. Around 7 per cent of the population own shares, compared to a fifth of Britons and half of all Americans. Then again, that's 7 per cent of 1.3 billion, with both the population and the numbers holding shares growing rapidly. Investors have opened 33 million brokerage accounts this year, six times the total for 2006.
Equities account for less than 15 per cent of Chinese households' financial assets, compared with half of those of American households (including pension funds), so again there seems to be plenty of ground for the Chinese to "catch up" on. So far, Chinese investor's tastes in equity pretty much mirror the shape of their economy, with light and heavy manufacturing accounting for about 80 per cent of equity holdings. Diversification into Hong Kong service stocks might well help the average Chinese investor to achieve a more broadly based exposure to capitalism.
Yet the story of the modern Chinese stock market is basically one of too much money chasing too few shares - hence the current bubble, which has pushed the average price-earnings ratio to 50. The value of tradeable shares - excluding those held by the state - is only 25 per cent of GDP. Considerable, but set that against figures of 150 per cent in America and over 100 per cent in India. State-controlled companies and local and central government quangoes also own and hold shares, so the actual amount of equity available to private investors as we in the West would understand the term may be smaller still. It also means that equities are relatively illiquid and subject to wilder price movements, something that, paradoxically, may help to fuel share speculation and the hot house atmosphere. The Chinese have long enjoyed gambling as a popular pastime, and some of that traditional passion may have found its way into the markets.
So one extremely welcome effect of the Government's liberalisation of the law will be to take the heat off the Shanghai and Shenzen markets, and indeed the overheating Chinese real estate market, and to reduce inflation (running at over 5 per cent, a decade high) generally by encouraging citizens to buy more equities instead of consumer goods.
Globally, the Chinese will also increasingly make their presence felt. On the plus side there will be that underpinning of international equity markets, again diversifying Chinese overseas investment away from its traditional destinations of US Treasury bonds and direct investment in foreign enterprises. More capital flows offshore will curb growth in China's record $1.33 trillion foreign exchange reserves, which have flooded the economy with cash and stoked inflation.
Less positive are the politics, even geopolitics of all this. There are already noisy grumblings in the West about Chinese economic power. The resurgence of economic nationalism, especially in continental Europe, has made this sort of activity especially unpopular, as the EU's statespersons draw up lists of "strategic sectors" encompassing everything from aerospace to yoghurt makers. So everyone from the Deputy Governor of the Bank of England to the German Chancellor seems to have voiced their displeasure at the size and power of China's sovereign fund, the China Development Bank. It has famously paid £6.6bn for a 3 per cent stake in Barclays Bank, having earlier staked £1.5bn for 10 per cent of the US private equity group Blackstone. There will be more deals like that, and they will one day be followed by Chinese private capital as well. In some ways it echoes what happened in the 1980s, when Japan's similarly large trade surpluses with the US in particular were recycled into purchases of famous American companies and iconic buildings. That was similarly resented in some quarters, until Japan's long slump put an end to talk about the Japanese "buying California" and similarly far-fetched ideas.
Will the Chinese soon be able to buy California? No, but the West needs to work out whether that great big dancing dragon is something to welcome or fear.