In the first 11 months of 2016, official figures show that foreign currency bank deposits owned by Chinese households rose by almost 32 percent, propelled by the yuan’s recent fall to eight-year lows against the dollar.
The rapid rise – almost four times the growth rate for total deposits in the yuan and other currencies as recorded in central bank data – comes at a time when the yuan is under intense pressure from capital outflows. The outflows are partially a result of concerns that the yuan is going to weaken further as U.S. interest rates rise, and because of lingering concerns about the health of the Chinese economy.
U.S. President-elect Donald Trump’s threats to declare China a currency manipulator and to impose punitive tariffs on Chinese imports into the U.S., as well as tensions over Taiwan and the South China Sea, have only added to the fears.
“Expectations of capital flight are clear,” said Zhang, who used her yuan savings to buy $10,000 this year. “I might exchange more yuan early next year, as long as I’ve got money.”
Household foreign currency deposits in China are not huge compared to the money that companies, banks and wealthy individuals have been directing into foreign currency accounts and other assets offshore. All up, households had $118.72 billion of foreign money in their bank accounts at the end of November, while total foreign currency deposits were $702.56 billion.
But the high growth rate in the household forex holdings are symbolic of a growing headache for the government as it struggles to counter the yuan’s weakness.
Gone in 60 Seconds
Chinese savers, eager to convert their yuan before the currency keeps depreciating, are snapping up U.S. dollar investment products that offer options for keeping money at home instead of sending it overseas.
The latest wealth management products from China Merchants Bank Co. in Shanghai last week, paying 2.37 percent annual interest on U.S. dollars, sold out in 60 seconds flat.
“You won’t be able to get it online because it’s gone in less than a minute,” said a branch manager, who would only give the surname Xu, and encourages customers to book a day in advance next time.
In recent weeks, policy makers in Beijing have put the brakes on everything from companies buying assets overseas to offshore purchases of life insurance to stem the tide of cash outflows. The fresh measures include checks by the currency regulator on any capital account transactions involving foreign exchange of $5 million or more. That followed steps earlier this year to ban the sharing of foreign-exchange quotas.
In November, banks sold 49 percent more foreign-currency denominated wealth management products, most of them in U.S. dollars, than in October, according to PY Standard, a Chengdu-based wealth management research and ratings firm that tracks the data. November’s foreign currency deposits increased 11.4 percent from a year earlier, more than double the 4.8 percent rise in October, according to the People’s Bank of China.
US dollar strength is highly likely to reverse soon, if indeed it has not already peaked. That does not necessarily translate into better fortunes for the Yuan.
Much depends on US interest rates, strength of the US economy, European instability, and global equity prices.
Things are so screwed up, especially in Europe, that it’s possible for the dollar to strengthen even if the Fed does not hike as expected.
The words “global mess” best describe the current state of affairs. Neither Trump, nor Merkel, nor anyone else can fix the structural problems.
Economists and politicians generally do not even know what the problems are. Rather, both fight symptoms, and poorly at that.
Mike “Mish” Shedlock