Record Capital Flight
Please consider Money has been leaving China at a record rate. Beijing is battling to stem the tide
Money was leaving the country at a record clip earlier this year through unauthorized channels, according to analysts. That’s bad news for China, which needs to keep financial reserves high to maintain confidence in its markets.
The State Administration of Foreign Exchange, a key government regulator, said Sunday that its most important job next year is to prevent major financial risks, avoid “abnormal” capital flows across its borders and crack down on illegal trading activities.
“We need to fight a critical battle” to defuse financial risks and maintain market stability, SAFE said in an statement. The pledge was an unusually strong one for the agency, which deployed the kind of military language more often used by top leaders in China.
Crackdown
- The agency has already started cracking down on capital flight. In November, it fined Chinabank Payments $4.2 million — one of the largest-ever fines SAFE has imposed — for moving money overseas.
- Major corporations aren’t the only ones linked to the flight of money out of China. Earlier this month, a Bank of China (BACHF) customer took out $50,000 in cash from his bank account over the course of a week. SAFE fined the bank nearly $6,000 for breaking a government rule limiting how much foreign currency people can take out of their accounts within a short period of time.
Serious Concern
You know it’s serious when a county with a $13+ trillion GDP is overly concerned over $50,000.
Why the Flight?
Investors fear another devaluation. And that’s a reasonable fear. State Owned Enterprises (SOEs) are imploding with unpayable debt.
And anyone with an ounce of common sense knows China’s GDP is grossly overstated.
For discussion, please see How Badly Overstated is Chinese and US GDP?
Currency Irony
Despite the fact that pressures on the yuan are negative, and for good reason, on August 5, US Treasury Declares China a Currency Manipulator Under Orders From Trump.
What a hoot.
If China floated the yuan and allowed free movement of money, the yuan could easily crash.
Impossible Trinity
This brings us to the “Impossible Trinity”
The problem with capital outflows lies in the so-called “impossible trinity”: a country with open capital markets can choose to have a fixed exchange rate or independent monetary policy, but not both. Although China’s soaring debt requires monetary…https://t.co/6BxgCxmqw7
— Michael Pettis (@michaelxpettis) December 20, 2019
“The problem with capital outflows lies in the so-called impossible trinity: a country with open capital markets can choose to have a fixed exchange rate or independent monetary policy, but not both.”
“As debt continues to rise, these inconsistencies become more extreme, so what can Beijing do? It turns out that the only way to maintain the exchange rate while increasing control of domestic monetary policy is to increase capital controls.”
Trinity Plus – Quadrality
China wants to do at least four things at once.
China has artificial GDP goals to meet. The more it tries to meet those goals, the more bad debt it will create.
Thus, it’s is not even a “Trinity”.
And the more bad debt China creates, the more capital flight pressure rises.
Quadrality and Beyond
China wants a stronger Yuan, more debt, 6% GDP, corporate writeoffs, lower interest rates, less support for GSEs, and capital controls.
Did I leave anything out? So, what’s it going to be?
And who has the correct word for all that?
Send Help!
Mike “Mish” Shedlock
“And who has the correct word for all that?”
I do, and so does China; and the word is “gold”.
Now let us recall another prescient comment about gold :
“…. gold will always be accepted as a form of payment by anyone, anywhere”
You nice people who don’t understand China and never will need to go sit in the corner and be quiet.
One more thing China also wants to keep its inflation low: I heard they are trying to conceal the real CPI which has jumped over the last 3 months due to shortages of pork etc…
If one believes that technology, AI and robotics will increasingly replace labor as an economic input, then you may also believe that China’s 1.5 billion population will quickly transition from a driver of production to a cost center (from a blessing to a curse). This will be especially true if we implement a global CO2 accord pushing up per capita energy costs.
The wealthy people got out of China long ago when they instituted maximum balances of $50000 in Chinese banks. Most of the money over this amount was subject to government seizure so wealthy people laundered it through real estate in the west coast of North America, Vancouver casinos and other means starting in 2014..
Some wealthy families also try to get their children out via boarding schools and universities. I wish US policymakers would embrace the influx of talent and wealth more aggressively. Australia and Canada seem to understand the opportunity better than the US does.
They are coming to the US too. They have bought real estate on the west coast. One of the cheaters busted in college admittance scam was a wealthy Chinese immigrant family who tried to pay their way into Harvard.
They are coming to US schools for sure. Our visa programs make it hard for these students to stay after graduation. So the top students earn (and maybe sometimes buy) their way into the top schools. The US then casts off the graduating finished product by making it very difficult to obtain work visas. We should be fighting to keep these graduates. My anecdotal observation (hosted two green card weddings in the past two years) is that many would gladly stay in the US. Terrible waste! Many of these kids will become net job creators.
When people point to China’s large holdings of U.S. Treasuries as proof of China’s solvency they frequently discount the amount of debt that has grown in the Chinese system. Even though China owns these U.S. Treasuries, China is running a massive U.S. dollar shortage both on a corporate and a national level. Much of the problem stems from Chinese companies having roughly $2 trillion U.S. dollar-denominated debt owed to international investors.
The rubber will meet the road as more countries that export to China question the value of the Chinese currency and demand payment in dollars and refuse the yuan. More on just how weak China’s currency is in the article below.
2 current articles in ZH about this topic, at least tangentially:
link to zerohedge.com
and a little warning from Sundance:
…the proverbial fuse and the(financial) powder keg…..WHAT, HOW, WHEN(not if) I wonder….
Yes… China is an honorable country that values the contributors to its success. That’s why Jack Ma “donated” his legal control of corporate holdings of Alibaba and voluntarily retired. Red flag to much? Look for news that Jack Ma accidentally fell off a roof top… and they are dead sure it will be an accident.
There is credible evidence that Alibaba is a giant fraud / Ponzi scheme. There are a number of hedge funds that follow the company. And those that diligently trawl the accounts will tell you how opaque the company is, given the hordes of subsidiaries it has, all lending each other money on a frequent basis.
Reminds me of a story where the EU we’re giving grants to Greek farmers ( the country newly joined) and an official came to a friend’s island to count some sheep. The same herd of sheep were loaned around the island several times so that all applicants had some livestock against which they could claim money from the EU.
True story.
Financial rumors are circulating that the Chinese government directs much of their purchases through Alibaba to inflate their sales.
China has been selling US Treasuries and buying Gold.
link to ceicdata.com
link to tradingeconomics.com
I’m sure the 50k is a concern, if not to deter others, but also just the rule by iron fist. They have laws-rules and are constantly looking to punish those that break them. In China’s case, technology will def cause more harm than good. Of course I say that when we have the NSA here in the US.
And the US gets its knickers in a twist when you move more than $10,000 out. And they have their tentacles in many foreign countries’ banks to ensure US citizens don’t keep more than that offshore.
Am no great fan of China, but am bemused that so many in the West deplore how much State control there is etc. whilst blithely ignoring the degree to which elites in the West enjoy a virtual monopoly of control of nearly everything that happens.
I suspect both systems are similar in that individuals enjoy much more freedom than their ancestors of a few generations ago to chart their own course in life. However, both are also similar in that whatever terrain they must navigate through is largely comprised of no end of government restrictions and regulations.
Once you report the cash transaction, then you are free to do what you wish with the funds. Necessary regulation to prevent tax fraud and money laundering by say, drug cartels. Quite a difference from the Chinese regulations which are meant to control an individual’s choices with his assets.
I don’t believe it’s just about drug cartels. USA is one of the only countries in the world which taxes citizens not resident there, and they have agreements with many foreign-based banks (all part of the same BIS system of course) to report account balances of US citizens abroad.
That, simply, is a form of State monitoring and invasion of privacy. We are so used to it we somehow regard it as very different from other, though similar, forms of ‘totalitarian’ control systems.
I think the money is leaving because a lot of people want to leave China and they need to get the money out first.
That money has been going into US, Canadian and Australian real estate for years now.
__________ Real Estate market appreciates China’s capital flight.
What is really bad is when you are laundering money you are not (too) concerned with amount paid … which screws the locals.
Yuan dollar rate is decided by China, there is no mystery, there is no free market valuation, the US agrees to this.
China has a surplus of US dollars, it is net positive.
It keeps those dollars as they are used in international trade, it could earn and hold any other currency to do so, the dollar is the most stable and widely recognised, as well as trade agreements with US including no doubt the notion of holding a dollar account.
So talk of Yuan valuation falling is nonsense because it is not used while China is earning and holds foreign currency surplus.
In this sense China is stronger for its independence, just possibly weaker for being a closed system, but the US is stronger for having a wide international system aligned to the use of its currency, because that allows it great financial and political influence.
China doesn’t have a lot of USD. They have a lot of debt denominated in USD. And there’s no reason for them to hold USD for international trade. Just because something is quoted in USD, it doesn’t mean it has to be bought with USD.
They have to hold something though, given the country is relatively closed and Yuan are not very tradable hence. Dollars (or dollar assets) suit given they track the global economy relatively well and have market depth ?
“So talk of Yuan valuation falling is nonsense because it is not used while China is earning and holds foreign currency surplus”
….
Not so fast. China’s foreign exchange reserves have dropped from $4 trillion (2014) to current $3.1 trillion. Due in part to defending yuan in past. What will burn rate of reserves (especially if tariffs cut into exports) be if dodgy debt starts to escalate? At what point will investors (speculators) force a run on yuan?
China’s debt has grown from $8 trillion (2008) to $40 trillion. Much of that to finance projects to nowhere. Good luck keeping that debt current.
Yes, I agree that China cannot be assumed to be in tip top shape, to be polite. Here we are doing a comparative of Yuan/Dollar , however the value of the Yuan is not open market, hence its current value is meaningless as comparison to what it would be worth on the open market. The tradable positions on Yuan are not a reflection of what open market value it would have, nor one way or the other, because an open market value would depend on what policies were implemented at that time. Yuan are just not comparable to dollars, they are linked to them by domestic policy is all.
The levels of Chinese debt are also domestic management, we can call malinvestment or pin them as national planning according to our taste.
However in terms of meaningful international financial account , position of physical trade and supply, China is ahead
That does not mean China is better off, or a better place to be, or richer even than the US, it just means that its international position is economically strong, just as that of the US is also but in a very different way – that of organisation and presence. US external debt is a big problem if confidence in the US is lost. The reliance on global provisionment also, for various reasons.
I don’t mean to be rude but almost everything you’ve said is wrong.
China has US Dollar reserves but it is not a ‘surplus’. These reserves underpin the value of the Yuan. Without those reserves the Yuan would be worth an awful lot less – perhaps worth very little. China’s reserve ratio is awful relative to other Asian nations: 7.5% versus 25% for most others. That makes the Yuan extremely vulnerable to a run on the currency. China is flirting with financial catastrophe given its level of indebtedness, especially in the midst of a broad economic slowdown – the idea that it has complete control of the value of its currency is pure trash.
Complete control is your invention, and you miss the point I am making completely.
China is a net earner of whatever currency you prefer to use, that is reflected in a positive international financial statement. The international value of the Yuan is set by the government using its foreign reserves to strengthen it if need be. Unless you are a bank, money is not an investment per se, it is used to trade in another’s market, and China controls its market more than the west. The Yuan does not need to have a specific value, high or low, as long as there is demand for Chinese produce and there is trust that the Yuan will not devalue severely during use IN China ( which is its purpose), it will be exchanged at whatever value for foreign currency, which will be used by PRC at choice.
As China runs a trade surplus, its account for use abroad is positive, it does not have to ask other countries to accept Yuan, it pays in produce. It is not interested in arguments about “what the dollar is worth” or if you think the Yuan is trash. It is interested in making sure it manages its own market and economy.
The “strength of the dollar” is that the US can close trade with China and so deny it much access to the world market via the US.
As for me being wrong, well they say opinion is often biased.
“China has artificial GDP goals to meet. The more it tries to meet those goals, the more bad debt it will create.”
Mish – Can you explain how this statement differs from what is currently happening in the US. Seriously? I don’t understand.
Fair question. I think that China relies far more heavily on fiscal policy to engineer their GDP result than the U.S. does. If your question is: “Are not both just making up the numbers with a lot of obscure spreadsheets to back the numbers up?”, then probably yes in China’s case more than the U.S., but if the same mechanisms are used over time then at least trends, if not absolutes, can be examined.
My point is that both countries use fiscal and monetary policy to “goose” their GDP numbers. (I don’t trust the validity of numbers from either country – in China it’s too much like fish stew, I don’t know what goes into it. In the US there are too many “seasonal adjustments”, “hedonal adjustments” and the like that rely on someone’s “Kentucky windage” to guess what the economy is really doing, and I suspect usually to the advantage of those in power.
But my major point is that while China apparently uses direct state investment to keep its zombie enterprises alive, we rely on a mix of monetary and fiscal policies to do the exact same thing. If the federal deficit were not $1T in the past year, the growth in GDP would have been zero. If interest rates were not kept artificially low, zombies would not have been able to survive and stock values would not have been able to reach the stratosphere. Moreover, when we use government funds to directly save companies, it is for noble reasons (think the salvation of GM and AIG) but when the Chinese do that it is for nefarious reasons.
And finally, when President Trump says something positive about the Chinese trade war the stock market jumps and when he’s pessimistic it dives. Does anyone other than me realize how easy it would be for fortunes to be made by anyone who he happened to talk with the night before his Tweet?
I think the US economic data is no more trustworthy than that of the Chinese. It’s a confidence game.
Good points. I agree with you on all counts. Both manipulate their GDP numbers. Both use a varying combination of monetary+fiscal policy to keep zombies alive and support the stock market.