Capital Flight: Money Leaving China at Record Rate

Mish

China is fighting "abnormal" cash flows. It's not surprising in the least.

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."

"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

Comments (50)
No. 1-15
Curious-Cat
Curious-Cat

"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.

Anda
Anda

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.

Tony Bennett
Tony Bennett

__________ 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.

KidHorn
KidHorn

I think the money is leaving because a lot of people want to leave China and they need to get the money out first.

ksdude69
ksdude69

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.

Realist
Realist

Hi Mish. You comment frequently on China. I was wondering if you have ever been to China? If so, did you travel to the major cities, ride the high speed trains, enjoy the countryside, talk to the people, etc? Just curious.

Greggg
Greggg

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.

FromBrussels
FromBrussels

...the proverbial fuse and the(financial) powder keg.....WHAT, HOW, WHEN(not if) I wonder....

Advancingtime
Advancingtime

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.

Casual_Observer
Casual_Observer

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..

SpeedyGeezer
SpeedyGeezer

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.

David C
David C

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...

ManAboutDallas
ManAboutDallas

"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.


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