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Comment by fspeech | Hacker News Reader

Why is it called an exodus? Other than the central bank selling dollars, for every yuan that is sold there is a buyer on the other side.

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.

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Let me add that the accounting identity I am referring to is that the trade surplus must be balanced the capital outflow. Since it is an identity it must be true in the past as well. It is just that in the past the private sector (on a net basis) was not very interested so it was the central bank that controlled all outbound investments. And as a result the PBoC has a very large and visible holding of foreign reserves. Now the time has come that the private sector and individual Chinese want to invest the surplus themselves and maybe then some so we see the central bank's reserve holdings falling. At this stage the central bank may be happy to just get rid of some of their excess holdings (also if they don't intervene and let the exchange rate fall they will get even more squawking and name calling overseas). But if it persists to the degree that the central bank runs out of reserves it will be forced to stop intervening in the forex market and then the exchange rate can fall as much as the market wants to, which by the way will make the trade surplus even larger.

The private sector wasn't "not very interested", they were required to sell their dollars to the central bank for RMB. They just were not allowed to hold dollars inside the country. That money was then taken out of circulation by buying US treasuries (what else could China do with it?).

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.

Right now PBoC is selling dollars, not buying them. This is why the reserve holding is going down. Are you talking about some future event when you said "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."?

Exactly. China will run out of reserves by about 2018 given the current rate of inflow and outflows.

I assume that by saying "China still has to buy most imported commodities using dollars...like oil" you are implying that China won't have enough money to buy oil. You do realize that is a direct contradiction to a large trade surplus, right? Or are you predicting that the trade surplus will soon turn into a deficit? If RMB goes into the so called "death spiral" which direction do you think that will push China's trade position?

I'm saying that China needs dollars to run its economy, not having dollars anymore can make it harder to run.

> 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.

The money is leaving the Chinese economy to be invested in other economies, hence an exodus. One could say that the money could always come back when the Chinese economy provides more opportunities. Or those rich people could just emigrate completely, leaving China behind.

There are only a few currencies (USD and maybe Euro) that circulate outside of the issuing country on a significant scale, but even for the USD the amount of cash outside of the country is puny compared to the worldwide dollar holdings. So strictly speaking money never leaves. It is easier to get the concept right to instead say that you now prefer to use the USD as the accounting unit for your assets.

EDIT: To clarify: "cash" refers to paper currency and coins; "dollar holdings" refers to dollar denominated assets.

If I change RMB to USD and then buy a house in the states, the money has left. If I just leave it in a bank in China, you are technically correct. If I transfer the money to a US account, China now has to transfer some of its dollar reserves to that bank.

No one is changing RMB to USD and just keeping that in China, you don't even get interest on that.

Keep in mind that there are two sides to every transaction. So while you sold RMB someone else must have bought it. While you bought a house in the US someone else bought stuff from China.

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).

> So while you sold RMB someone else must have bought it.

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.

I don't think you understand what he means. If you change RMB to USD then there must be someone changed USD to RMB as your counterparty. The RMB you had never leaves China(unless one day RMB has the status like USD where people use it outside US for things unrelated to US), it's just in some other people's hands now.

Yes, I get that. But it isn't that simple...it doesn't have to be "now". The RMB I'm changing to USD today was probably bought 5 years ago (when China had a huge trade surplus and lots of excess dollars on hand). Hence why China has to sell treasuries today to give me my USD. I'm not technically "trading", the RMB is not fully convertible in that sense.

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.

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