China's Money Exodus
bloomberg.com
bloomberg.com
Let me try a different narrative that could be equally valid: as the oil price has halved the Chinese are getting a subsidy of 150 billion dollars a year. Coupled with other commodity windfalls, the regular trade surplus, and a domestic slow down that reduces the potential return on domestic investments, they have cash busrting their wallets and must seek alternatives. Overseas investment (a.k.a. the money exodus) is the only way to keep the accounting identity true.
There was a time when China wanted to get rid of some of their USD holdings, so they encouraged companies to take RMB, buy dollars, and invest abroad. But taken to an extreme, eventually China runs out of reserves, has to buy dollars on the open market to satisfy demand, and that leads the RMB to de-valuing as they print more to buy dollars.
China still has to buy most imported commodities using dollars...like oil. A de-valued RMB will most certainly lead to inflation at home, causing prices to rise. And then Chinese will start hoarding dollars if they lose confidence in the RMB, leading to a sort of death spiral.
At this time, China wants to keep money in China, and so is cracking down on banks exchanging to USD too easily. Capital controls are a real thing.
> If RMB goes into the so called "death spiral" which direction do you think that will push China's trade position?
China can't continue being the world's cheap factory. It is horrible for the environment, and it doesn't do as much for normal people as it used to. Say stuff from China is cheaper...so what? Americans and the west win, because China continues to subsidize their wasteful lifestyles, but what does China win? More trade isn't the answer anymore, eventually people actually want to buy things and not just sell them.
And honestly, I'm not a trade position.
EDIT: To clarify: "cash" refers to paper currency and coins; "dollar holdings" refers to dollar denominated assets.
No one is changing RMB to USD and just keeping that in China, you don't even get interest on that.
Meanwhile the Chinese economy runs on the RMB. Has the amount of RMB in circulation been dwindling? I doubt it. While the PBoC sold down forex holdings it also reduced reserve ratio and interest rates and directly intervened through money market operations to compensate.
Has the total forex holdings of all Chinese entities been going down? Likely but they swapped the holdings for other assets such as real estate. It has more implications for the other markets than for China, in that the asset preference is changing from central bank assets (forex reserves holdings of PBoC invested in government bonds) to assets preferred by private investors (real estate or other assets).
And who is selling USD to buy RMB these days (besides the export companies that have to)? Definitely not my Chinese colleagues, nor my foreign colleagues. The direction is basically one way at the moment. How long can that be sustained? Do you want to change some of your USD to buy a house in Shanghai?
> Meanwhile the Chinese economy runs on the RMB. Has the amount of RMB in circulation been dwindling?
I assume not, they are probably just printing a bit more ATM. And the vast majority of the Chinese people don't have dollar assets...its just the middle/upper class we are talking about. Their share of the economy is huge, however.
> Likely but they swapped the holdings for other assets such as real estate.
Yep. That real estate isn't in China, and isn't contributing to the Chinese economy.
Companies are still trading, earning USD, changing it to RMB. There are still trade surpluses. But it isn't enough to keep the surplus steady, the surplus will now shrink for awhile.
Outside of town boundaries, they can buy residential property but must build on it within 2 years, spending at least USD$125k on the home. Failure to do so attracts a penalty of 20%(off the top of my head) of the value of the property annually.
The chinese were just buying up too much property and locals couldn't compete.
If one wanted to be protectionist, the increased taxes could be set to only apply to non owner-occupied residences.
Any system with rules that can be gamed is not going to work in China. The only solution is a tax on all property.
Case in point: http://world.time.com/2013/04/29/why-chinese-couples-are-div...
China has a huge problem, however, in that property was bought already with upfront taxes and the assumption of no property taxes. Introducing a property tax now is going to make those people mad, understandably.
Why would you assume economic rules would never change? Just because there is no tax today does not mean there's no tax tomorrow. If anything, you should aways be assuming taxes will be higher in the future.
Now consider buying X in China. You have to pay a tax up front, and the developer paid a tax (or well, paid for the land). Also, X's price is much higher since the assumption is that X will not be taxed in the future. Now China introduces a completely new property tax on X and all your assumptions are destroyed. The rules of the game are different, and now you can't resell X under the same assumptions.
"(Chinese bank's) nonperforming loans may be at 20 percent to 21 percent, or even higher." http://www.bloomberg.com/news/articles/2015-10-29/risky-math...
"by 2018 all of China's excess reserves — cash that it has on hand to use immediately — could be gone." http://www.businessinsider.com/chinas-record-capital-outflow...
"China’s 42.2 trillion yuan (US$6.7 trillion) bond market is flashing the same danger signs that triggered a tumble in stocks four months ago" http://www.thestar.com.my/Business/Business-News/2015/10/10/...
You can claim that the Chinese financial system is immune to economic cycles and that the law of gravity doesn't apply. But we've heard that before about American real estate, where people were saying "how long has this real estate is about to crash story been in the news?" in 2007...
If everyone around you is talking about how to get money out of China, then something might be up.
American real estate is still insane. The housing crash was really just a small dip on what seems to be an unrelenting hyperinflation in real estate.
When government policies deliberately encourage insanity -- as many policies both in the USA and abroad (such as in China) do for real estate -- then the economy can remain insane much longer than you can remain solvent. It might remain insane so long that the entire rest of the economy reorganizes around the insanity, institutionalizing it into a permanent state of affairs.
I'm a bit concerned that this is going to happen with housing... that we'll end up with a future where most things are very cheap but real estate is so insane that some huge fraction of everyone's earnings just goes into paying rent or paying off a 60 year mega-mega-jumbo mortgage. Everyone will just accept that a starter home starts at $2.5 million.
As far as China goes: why can't its government just keep artificially re-adjusting the economy so that it can never fall for as long as its government exists? I don't see why there's a hard upper bound to Keynes-on-meth economic policy, and China in turn is so huge that this could distort the entire world economy. As this article hints it's probably one of the factors driving real estate nuts. The only thing I can see that could stop this is if other large nations and blocs like the EU decide that China's exporting of domestic economic insanity is hurting them and decide to start some kind of trade or currency war. But that's unlikely since the entire world is completely dependent on Chinese manufacturing power.
Adjustments work when they are small, but if you keep adjusting, eventually your house of cards will implode. You'll either crash hard or print more money, perhaps crashing even harder. The US has done OK in making adjustments, because they just need to nudge it this way or another. China has meddled much more deeply in the economy, creating a lot more risk for a hard crash in the near future.
The key point is stability: housing prices really shouldn't fluctuate much outside of abnormal conditions. So even if they are high, as long as they are stable, then you at least feel ok about taking that loan out if you can.
The problem is that many see real estate as an investment and an opportunity to get rent. That does nothing for the economy, and at least property taxes work against that (Swiss takes that to the next level with a rental tax, even if you don't rent your house).
That right there is the fundamental flaw in your thinking. You think boom and bust is physics. It's not.
(Here we go again, for like the 50th time explaining how this stuff works)
It's a direct consequence of the fractional reserve banking model that sticks the taxpayer with the bailout. In China, the government just prints the money electronically. They've had trillions in bad loans in the banking system forever and the Chinese gov periodically goes and cleans it up with printed money and shoots a few misbehaving bankers. In the west, we make the taxpayer and savers pay 100 cents on the dollar on the bad loans and transfer wealth from them to the bankers. We also take everyone's property and give it back to the bankers while China just lets all the bad loans sit in default forever without any action being taken. They even periodically let big investment funds default and it doesn't crash the financial system because the reverse money multiplier doesn't kick in like it does in the west because the gov just comes in and prints the money, hands it to the banks and they keep lending.
1. An assets crash, turning who were winners (the speculators) into losers. Is there really a reason for that 90 sqm apartment in Beijing to be worth $1 million when it can only rent for 9000 RMB a month?
2. Significant inflation with the RMB, keeping the (well connected, mostly middle class) winners as winners, and turning everyone else who wasn't speculating into losers. Keep in mind that a vast majority of the Chinese population has saved lots of RMB and isn't exposed so much to assets (though they would like to be).
We, like you, think that 2 might be a possibility. Hence my need to transfer my RMB into USD and get it out of the country. Likewise, those who know better than me have been more aggressive about getting out of the RMB, as the article states (I had to go through and get tax receipts, income statements, and a bunch of other hoops to do my transfers). 1 is still a possibility also, which means getting into real estate (the only investment for us mere mortals) is very risky.
And just because you can print your way out of a crash doesn't mean the crash hasn't happened. It sucks when the US does this with its freely convertible currency, it is even worse when/if China does this with its nonconvertible currency.
In the US urban infrastructure is garbage outside of a few major metros so all the money piles into those and the rest is is ignored and then bubbles and pops. China actually does development like they mean it and is expanding out thousands of miles of roads and trains building out new markets so the new money injected can find a way to profitably invest itself.
And the houses are poorly constructed concrete monstrosities, no central heating (I hate visiting in the winter). You just can't help but think they'll be torn down in 10 or 20 years before they are actually used. Even in Beijing, an apartment building built 5 years ago would be considered decrepit by western standards. I was looking for a new apartment to rent and came away thoroughly depressed...the prices were high sure, but there was nothing even close to what I wanted anyways. So I stayed put in my current flat, whose rent hasn't gone up in the 3 years I've been renting it.
Chinese urban infrastructure would love to have US urban infrastructure problems. Trains are wonderful, roads are great also if you want to cut down on 10-day long traffic jams. But they are nowhere near the states in terms of infrastructure, and much of it are white elephant projects that will never contribute to the economy in any meaningful way.
http://www.abc.net.au/news/2015-10-12/selling-the-australian...
It's an interesting economic dynamic, in-explainable with orthodox theory, it's really about the circumstances. Which makes it difficult to analyze and model, too.
Are they commuting to more urban areas?
:-)
>Money Flooding Out of Canada at Fastest Pace in Developed World
http://www.bloomberg.com/news/articles/2015-11-02/money-floo...
It's not a coincidence it's all happening simultaneously globally. For the same reason, every GDP on earth simultaneously skyrocketed (priced in dollars) as the dollar lost value in 2002/03, as the US Government began running large budget deficits under Bush.
It's causing the mess in China to get worse, by pulling capital out of China more rapidly. It crashed Brazil (check out when their unemployment began to soar, exactly when the dollar run began [1]). It crashed Canada and also hit Australia hard. It caused Russia to lose 1/3 of its economy, and is bleeding off their reserves and emergency fund; and the worst isn't over yet. The strong dollar ended the USSR by tanking the price of oil, and caused their crisis in 1998 as well.
The same thing happened in Asia in the late 1990s, when the strong dollar crashed numerous economies there. This time is worse in terms of sheer damage, as those Asian economies are far larger today (as are Canada, Australia, Russia and Brazil).
Every day the dollar remains strong, things will get better for the US and worse for almost everyone else. It has already pulled trillions in capital back to the US, and has boosted real US annual purchasing power by at least $2 trillion in just 18 months. The US has gone from #9 or #10 in the world in GDP per capita in 2014, to #5 on the IMF's projections for 2015, due to the dollar.
How biased are their opinions and what do more neutral experts say about the direction the global economy is heading? Honest question as I am not an expert.
http://www.chinadaily.com.cn/china/2015cpcplenarysession/201...
They just flat out tell you "China will keep to a growth rate of 6.5% no matter what". All is well because...they promise.
I would also make the argument that the majority of the population (myself included) would not benefit from participating in economic activities requiring cynicism. I think financial literacy for most people is a 'learn it yourself' affair that most people choose not to do, and therefore they should avoid the financial world like the plague.
Be as naive as you want in the cushy world of low risk, low yield, investments. Happier lifestyle I'd wager.
Living in China, I've learned to appreciate fair financial systems. Many investments I wouldn't have considered in the states before now look like really good deals, simply because they are much more "fair" than what is available to me in China.
China has no low risk/low yield investments beyond long term savings accounts that don't even beat inflation. That is why so much money was rushing into the stock market, and now again, real estate. Because literally there isn't anything else (ok, maybe some undergound banking deals, but do you want to deal with the mafia?).