The Golden Hordes

As China's late helmsman Deng Xiaoping declared, "To get rich is glorious." But according to Zhou Xiaochuan, China's current central-bank governor, to diversify is imperative. For the last several months, Zhou has been stumping across the country for outward-bound investment, encouraging China's legions of individual investors to start spreading their savings abroad. Last month Zhou and his fellow financial mandarins were rewarded when the Shenzhen-based China Southern Fund launched the country's first-ever international mutual fund on Sept. 12, raising more than $4 billion in a single day—the bulk of it from average retail investors.

The offering speaks volumes about the potential power of Chinese investors on the world stage. It's not the first time Asian retail investors were supposed to reshape the global economy. Back in the 1980s, everyone expected the Japanese to flood the market with their voluminous savings. Yet two decades on, most still park their savings in low-interest bank deposits. In China, however, mutual funds this year surpassed bank deposits as the country's favorite way to invest. Even though they are a lot less rich, the Chinese are already more daring with their money than the Japanese. "This story is underappreciated by the international community," says Hongbin Qu, the Hong Kong-based chief China economist at the Hong Kong & Shanghai Banking Corp. "The globalization of China's capital accounts will have as much of an impact on the world economy over the next few years as its cheap labor force has had for the last decade."

Since September, four Chinese fund-management companies have raised nearly $30 billion in retail investment for foreign markets. Most recently, China International Fund Management raised nearly four times its quota of $4 billion on its first day of sales. The CSF launch was oversubscribed by more than three times its initial $2 billion quota, which was doubled in response to furious demand. Assuming that global market conditions don't deteriorate, analysts expect an additional $500 billion (15 to 20 percent of Chinese savings) to flow to international markets over the next few years. According to JPMorgan's Hong Kong office, Chinese investors are opening mutual-fund accounts at a rate of more than 50,000 per day; nearly half of such funds are joint ventures with foreign firms.

Experts ascribe the fearlessness of these relatively unsophisticated investors, in part, to government policy. Whereas Tokyo corralled household savings through oligopolistic banks, Beijing is allowing retail investors to go it alone. But geography and psychology also play a role. As a continental power, China has had frequent and often violent interactions with outsiders, but with each invasion it grafted the best of foreign systems onto its own. Compare this with Japan, an ethnically homogenous and geographically insulated country that was spared foreign occupation until recently. Even under postwar U.S. administration, it rebuilt according to its original mercantilist precepts, resulting in an inbred and parochial investment culture.

China's large and successful diaspora, compared with Japan's nearly extinct one, has also defined the way Chinese perceive the outside world. (Tellingly, while China's cell-phone carriers have for years offered flexible roaming services, Japan's are just now unveiling their own.) Take the people of Wenzhou, the coastal enclave of entrepreneurs famous for maintaining underground financial networks with their extensive diaspora. The advent of Chinese global-investment funds creates a legal and transparent channel for what the Wenzhounese have been doing for centuries.

Finally, the Chinese are unusual in their ability to embrace failure and reinvention—a characteristic more associated with the West than the East. In Japan, failure brings dishonor and the shame of notoriety. But Hong Kong billionaire Li Ka-shing is celebrated for having relinquished as many fortunes as he made.

Of course, the future of Chinese investment will ultimately be predicated on the global economic picture. Twenty years ago, punters in Hong Kong's nascent fund industry were swapping domestic and global trusts like individual stocks despite redemption costs—right up until the crash in October 1987. If China's own frothy markets tank, or the U.S. economy stumbles badly and brings its No. 1 trading partner down with it, it could all end in tears. Until then, though, investors will be lining up for the next offering.

The Golden Hordes | World