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Capital Outflows Chime With China’s Bears
A poster advertising the renminbi (RMB) currency (Chinese yuan) in Hong Kong. Chinese wonder about the Yuan and its affect on the economy. (Laurent Fievet/AFP/Getty Images)
Following in the tracks of a highly regarded investment manager, many Chinese investors have begun to reduce their exposure to China’s economy and shift their wealth overseas.
Mr. Jim Chanos predicted in a recent interview with Opalesque TV that China’s economy will meet with disaster soon as bad debts throughout the economy but especially in the real-estate sector are set to unwind. He believes that the credit bubble in China makes the debt problems in Greece, Spain and the USA look minor by comparison.
Mr. Chanos manages the Kynikos (Greek for “cynic) hedge fund which specializes in finding overvalued and overpriced investments. He became well known when his fund took a large short position in Enron, whose share price collapsed as the consequence of accounting fraud. Seeing another great short-opportunity, he has been bearish on China for nearly two years, a profitable trade.
Mainland Chinese also seem to share Mr Chanos negative view on the Chinese economy as according to Chinese Ministry of Commerce data, investment capital is leaving the country.
From January to June of 2012, China invested $35.42 billion in 116 different countries and 2163 different projects, an increase of 48 percent compared to the same period last year. What shows up in the aggregated data is also confirmed by on the ground reports.
Yuan RMB Denominated Assets May Depreciate
An online report by the Economic Observer mentioned the experience of an investor named Liu Yun (pseudonym), who went back to China near the end of 2009 from Canada. Unable to find a good project to invest in, he bought eight different real estate properties in Beijing.
“Though the income and profit from these properties is decent,” he said, “I will still sell some of them.” He mentioned that he does not feel safe keeping his assets in mainland China and ultimately wishes to keep only one property in China, saying, “Many mainlanders I know are transferring their wealth overseas, feeling that RMB-denominated properties are not very secure and that the future looks gloomy.”
The Economic Observer report also cited a currency trader who senses that the market is expecting the RMB to weaken. The RMB is pegged to the US dollar and given the trade surplus normally the People’s Bank of China (PBOC) has to sell RMB to keep the exchange rate low. This helps Chinese exporters compete on world markets. This time, however, China’s central bank took actions to stop the RMB from depreciating and the recent reduction in China’s foreign reserves has to do with China’s central bank selling dollars and buying RMB to support the currency.
Dollar-Buying Trend
Across the table from the PBOC on the other side of the trade are many ordinary citizens and businesses. A worker at a China Construction Bank branch in Beijing said, “Currently US dollars are in high demand, for the past few days, any currency exchange in excess of US $2000 needs to have a prior reservation made.”
“Last year, we tried to sell insurance products with rates provided in RMB, it was very popular, this year sales are not going well.”
A product manager at an insurance firm said, “Some people at a foreign bank told me, financial products in US dollars are selling well.”
This trend of abandoning RMB for dollars is even more obvious among businesses.
“The typical financing, payment, or balance transfers can be used to move cash, and overseas mergers and acquisitions are very popular,” said an insider who wished to remain anonymous. “Especially in second or third level businesses below the state owned enterprises, there are lots of overseas mergers and acquisitions.”
The most obvious way to circumvent the controls is to have the Chinese party provide financing to the foreign partner, thereby transferring funds out of China through this company.
These arrangements are necessary as China keeps tight capital controls to manage the economy. The most obvious way to circumvent the controls is to have the Chinese party provide financing to the foreign partner, thereby transferring funds out of China through this company.
Secondly, some intermediary organization can provide fake capital verification documents for foreign investments in China, directly creating overvalued foreign investments. These overvalued foreign investments can be transferred back overseas as profits or liquidation.
In addition, some Qualified Domestic Institutional Investor (QDII) financial institutions can directly invest in overseas markets. By buying the unused quota from these QDII institutions, money can also be moved outside of China.
The last method is via special services provided by multi-national banks. For example, the Singapore branch of the Industrial and Commercial Bank of China (ICBC) offers credit facilities secured by standby letters of credit from ICBC branches in China. Some banks also offer credit facilities overseas secured by deposits in a bank branch in China.
Latest Data from the Central Bank of China Shows Capital Outflows
These moves are also register in PBOC data and some analysts are starting to worry as during the second quarter of 2012, China’s trade surplus decreased by a total of $68.7 billion.
Hongyuan Securities’ chief analyst, Fan Wei, warned in a research report that “currency fluctuations will seriously affect asset values in China.”
Adding that reduction of the trade surplus to the $30 billion of direct foreign investment out of China shows a capital outflow of over $100 billion.
—Fan Wei
“Adding that reduction of the trade surplus to the $30 billion of direct foreign investment out of China shows a capital outflow of over $100 billion,” Fan wrote. “This will force domestic asset allocation to take into consideration the flow of capital, and the changes in exchange rates.”
These $ 100 billion could be just the beginning, however: Political Science Professor at Northwestern University Victor Shih, estimates that the richest Chinese families have aggregated over $5 trillion in wealth. So if a large percentage of that wealth needs to be converted to dollars, then even China’s US$3.2 trillion foreign reserve isn’t large enough to cover for it. This is especially so as many of these people may be corrupt officials who have something to hide which dramatically reduces the availability of dollars for these illegal transactions.
Read the original Chinese report.
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