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Beijing We Have A Problem: China Suffers Record Capital Outflow In Q1
Back on April 18 in “China Sees Largest Capital Outflow In Three Years,” we noted that according to JP Morgan estimates, China saw its fourth consecutive quarter of capital outflows in Q1, bringing the total over the last 12 months to some $300 billion. This is part and parcel of what we have called China’s “currency conundrum” wherein Beijing needs to devalue in order to support the export-driven economy, but can’t for fear of exacerbating capital flight and/or jeopardizing an IMF SDR bid (assuming China is still interested in the latter after Washington’s abject refusal to reform the Fund's structure), or to put as simply as possible, “devalue too much, and the capital outflows will accelerate, not devalue enough, and the mercantilist economy gets it.”
The official numbers for the first three months of the year are now in and sure enough, China reported a record $159 billion deficit on its capital and financial accounts.
More, via UBS:
FX reserves shrank sharply by USD 113 billion in Q1, following last Q4’s contraction of USD 45 billion and 2014’s annual increase of USD 22 billion. PBC’s FX asset also shrunk by RMB 252 billion in Q1 (vs. last Q4’s fall of RMB 134 billion). Our preliminary estimates show that China saw non-FDI capital outflows of around USD 190 billion in Q1 on a BoP basis. Recent data release showed that China’s capital & financial account (excluding reserve assets) recorded a deficit of USD 159 billion in Q1…
In Q1 2015, China saw an even sharper pace of FX reserve contraction, with a negative valuation effect (of around USD 34 billion) and non-FDI capital outflows (of around USD 190 billion) more than offsetting a still sizable trade surplus of goods & service (USD 77 billion) and largely stable net FDI. The main types of non-FDI capital flows include the usual portfolio investment flows, trade credit flows, other foreign borrowing and foreign lending, domestic banks interbank borrowing and offshore lending, interest rate arbitrage flows, and capital flight.
Factors driving recent persistent capital outflows likely include: corporates’ increasingly holding on to their FX proceeds due to weaker RMB appreciation expectation; growing market concerns over China's property downturn and recent weak economic data; weakening or unwinding of interest rate arbitrage capital flows due to the anticipated rise in global interest rates and fall in domestic interest rates; an increased desire by domestic residents to diversify their assets globally; among others.
And as we noted last month, this marks four consecutive quarters of outflows. For Beijing, the implications of the above are clear, although the proper course of action is anything but. Here's FT:
Capital outflows are complicating efforts by the People’s Bank of China to support the economy through monetary easing. For the past decade, central bank purchases of foreign exchange inflows were the main source of base money creation in China's banking system. Now, with outflows threatening to shrink the money supply, the central bank is turning to new mechanisms to expand it.
The most important of these is cuts to banks’ required reserve ratio. The PBoC once used RRR rises to restrain excess money growth by forcing commercial banks to keep a chunk of newly created base money on reserve at the central bank, where it is unavailable for lending. Now the PBoC is doing the opposite: cutting the RRR to offset the loss of liquidity caused by capital outflows.
Yet even after RRR cuts totalling 1.5 percentage points this year, the ratio for big banks, at 18.5 per cent, remains far higher than in any other large economy. Most economists believe that for the PBoC to meet its broad M2 money growth target of 12 per cent, further RRR cuts will be necessary.
“From the start of this year, capital inflows have been negative. We believe the key factor now restricting effective monetary easing is that the required reserve ratio remains at a high level,” said Liu Liu, macroeconomic analyst at China International Capital Corp.
In addition to RRR cuts, the central bank has slashed benchmark rates three times since November. But lower rates could exacerbate capital flight by making Chinese assets less attractive, especially in comparison to the US, where the Federal Reserve is expected to raise interest rates this year.
The PBoC’s signal to the market that it intends to hold the renminbi stable has helped prevent the trickle of outflows from becoming a flood.
For those who prefer a visual explanation and are interested to know why all of the above means QE in China is getting more likely by the month, read on.
With each passing data point, we get still more evidence that China’s economy is in trouble...
...but thanks to rising capital outflows...
...Beijing has favored policy rate cuts over devaluation...
...but three benchmark rate cuts since November and two RRR cuts this year aren't working...
* * *
What all of this means — just as we said more than two months ago in "How Beijing Is Responding To A Soaring Dollar" — is that QE in China may be inevitable. Since then, the PBoC has indeed moved in that direction, while still maintaining that outright QE will not be necessary given the number of policy tools at Beijing's disposal. Shortly after explaining all of the above in March, we went on to suggest that the likely form Chinese QE would take would be the purchase of local government debt (which totals 35% of GDP).
Sure enough, the PBoC ended up announcing a program whereby banks will be allowed to pledge local government bonds for cash which can then be re-lent to the broader economy. While this doesn't quite constitute QE (it's akin to the ECB's LTROs), it is nevertheless a definitive step in that direction and unquestionably represents a foray into "unconventional" policy.
If capital outflows persist over the coming quarters and if economic data continues to come in soft (which it likely will), China will likely first move to cut policy rates further, with sell-side desks projecting at least three more cuts in 2015. Eventually however, that avenue will be exhausted and at that point, we will see if the PBoC's contention that Chinese QE "doesn't exist" holds up under pressure.
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Wei Go Now
Gu head
https://youtu.be/llbzUyv1CLU
The natives in the US have a problem (at least for now, until the chinese get japoned). They can't afford shit because the Beijingites are buying everything up at ridiculous prices.
Bentley dealers in California have a "problem" too ;)
Ha exactly. Try buying a new Range Rover in California. Take a number, and wait 3 months+
A NEW vehicle must be nice. Haven't experienced that in a long time.
It's not that bad, They will replace dollar paper with yuan paper. China doesn't need dollars, because they are going to sell their production for yuans
THE FREE SHIT ARMY ATTACKS!
BTFD They are going to print!
"Now, with outflows threatening to shrink the money supply, the central bank is turning to new mechanisms to expand it. "
Wait.
What??!
Hot money leaving is a Central Bank problem? When was THAT decided?
-Or are the Princelings and hustlers stealing everything that isn't nailed down, converting to foreign currencies and running off to buy RE in London, Frisco, Vancouver, New York, etc.. ?
QE in China just supports the real estate market in SF, Seattle and Vancouver. Hard to get that money supply up when the oligarchs are carting it out, one briefcase at a time.
They lower interest rates and the money goes elsewhere. That's easy to figure out but CBs just don't get it.
The POINT is: if you're using trade inflow as your BASE money to base your M2 multiplier on, you are RETARDED.
Also can anyone explain to me what your saying if your M2 growth target is almost twice your GDP target? Live long and prosper?
And finally, instead of squabbling over missing liquidity and competitiveness, how about at this rate, you're going to be out of fx reserves soon?
Ehhh, following everything presented here, why can't they simply just buy more USTs to offset the capital outflow?
FT contends purchase of foreign exchange inflow is the major source of base money creation in China
you see the capital outflow, you see the rebound in UST buying at the same time, what? they can't be related? isn't that trying to counterbalance base money creation per FT's point?
and I'm not buying the Belgium is China line, if China wants to mask its UST purchase, why did it start purchasing under its own name just now? shouldn't they be buying through Belgium still?
Why China even need dollars or UST???
China have RMB and can produce and buy everything with RMB. China doesn't need dollars.
Is it so hard to understand??WTF REALLY?
The fact that an increasing number of Chinese want their money
a) in dollars
and
b) in another country
should give you pause for thought.
and just to take it a bit further, who invented the playbook for them to follow, for a couple of decades?
The "think tanks" are there for show, who'd dav thought?
The big play, sonn.
Exactly. China, Chinese currency and Chinese government are NOT the gold standard. There's a lot of myth and fantasy going on in Mao's economy. The corruption is rampant and it's not long now before the population will get restless. Reason why leadership is trying to crack down on corruption is because they know their people are pissed. SHTF time soon in China.
hahahah what an ignorant comment . Perfext example of being dumbed down by western yellow press . good luck genius .
Mirror, mirror, on the wall
Who's the dumbest bank of all?
I cannot lie to you, oh mighty one.
It is the one that presides over the world's largest primary economy and has a massive trade surplus
Yet nevertheless finds itself in the same leaky lifeboat as all the other deadbeats.
dont educate or update your facts and act like a retard always . What an exceptional murican idiot you are .
China numbers look as bad as US numbers, Which means:
Record high Chinese stocks
Record high US stockas.
Imagine how high stocks would be if the two countries economies were really worth a shit?
Hanenergy shares plunge 47% on fake turnover in HK trading. Tip of the "iceberg" as such company in China habitually fake their accounting...