One of the motivations behind China’s historic decision to open its economy 40 years ago was the need to attract foreign direct investment. Strong inflows followed and helped transform the Chinese economy. But these are now starting to be eclipsed by a newer font of capital that is surging into the country’s financial markets.
The shift in focus from direct investment into factories and offices towards portfolio flows into stocks and bonds reveals much about how China is changing — and how it is starting to exert greater influence over the world’s financial system.
Its domestic stock and bond markets — which rank as the world’s second and third-largest, respectively — have long been relatively sequestered from the outside world because of China’s strict capital controls.