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.
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.
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.
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."?
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.
Fijian here. As of a year ago, foreigners are no longer permitted to buy residential properties within town boundaries.
Outside of town boundaries, they can buy residential property but must build on it within 2 years, spending at least USD$125k on the home. Failure to do so attracts a penalty of 20%(off the top of my head) of the value of the property annually.
The chinese were just buying up too much property and locals couldn't compete.
Chongqing and Shanghai have tried this (applied property taxes to 2nd houses for luxury properties). But that is easily gained by simply throwing in a Smurf or two (put the house in a family member's name).
Any system with rules that can be gamed is not going to work in China. The only solution is a tax on all property.
Some states in the US do have high property taxes. Texas, for example, hovers around 3%, and it's generally a much healthier fiscal environment for residents than states with lower property taxes (and higher income taxes), such as California.
Property taxes encourage good behavior in making people use their property productively. With property taxes, you just can't sit on property as a form of speculation, which would take it out of use to the detriment of the local economy. In china, even in first tier cities, you have a huge number of apartments that are unoccupied because they are bought for speculation reasons alone.
China has a huge problem, however, in that property was bought already with upfront taxes and the assumption of no property taxes. Introducing a property tax now is going to make those people mad, understandably.
> China has a huge problem, however, in that property was bought already with upfront taxes and the assumption of no property taxes. Introducing a property tax now is going to make those people mad, understandably.
Why would you assume economic rules would never change? Just because there is no tax today does not mean there's no tax tomorrow. If anything, you should aways be assuming taxes will be higher in the future.
You buy X in the states knowing the rules of how X is taxed. Property taxes might go up on X in the future, but you know that.
Now consider buying X in China. You have to pay a tax up front, and the developer paid a tax (or well, paid for the land). Also, X's price is much higher since the assumption is that X will not be taxed in the future. Now China introduces a completely new property tax on X and all your assumptions are destroyed. The rules of the game are different, and now you can't resell X under the same assumptions.
How long has this "China is about to crash" story been in the news? It's been around for at least 10 years. There's an article almost every month. I should write a big FAQ about why the Chinese financial system doesn't follow western financial system rules and link to it whenever these articles come up.
The economy can remain insane longer than you can remain solvent.
You can claim that the Chinese financial system is immune to economic cycles and that the law of gravity doesn't apply. But we've heard that before about American real estate, where people were saying "how long has this real estate is about to crash story been in the news?" in 2007...
If everyone around you is talking about how to get money out of China, then something might be up.
I mostly agree but I have to quibble just a little:
American real estate is still insane. The housing crash was really just a small dip on what seems to be an unrelenting hyperinflation in real estate.
When government policies deliberately encourage insanity -- as many policies both in the USA and abroad (such as in China) do for real estate -- then the economy can remain insane much longer than you can remain solvent. It might remain insane so long that the entire rest of the economy reorganizes around the insanity, institutionalizing it into a permanent state of affairs.
I'm a bit concerned that this is going to happen with housing... that we'll end up with a future where most things are very cheap but real estate is so insane that some huge fraction of everyone's earnings just goes into paying rent or paying off a 60 year mega-mega-jumbo mortgage. Everyone will just accept that a starter home starts at $2.5 million.
As far as China goes: why can't its government just keep artificially re-adjusting the economy so that it can never fall for as long as its government exists? I don't see why there's a hard upper bound to Keynes-on-meth economic policy, and China in turn is so huge that this could distort the entire world economy. As this article hints it's probably one of the factors driving real estate nuts. The only thing I can see that could stop this is if other large nations and blocs like the EU decide that China's exporting of domestic economic insanity is hurting them and decide to start some kind of trade or currency war. But that's unlikely since the entire world is completely dependent on Chinese manufacturing power.
You are totally right. You need to look at supply and demand in the states, many markets are distorted by a lot of baby boomers ready to leave the market and speculation from abroad. I think our future might be Switzerland, where that house will cost you $1 million, but it isn't going to go up or down very much.
Adjustments work when they are small, but if you keep adjusting, eventually your house of cards will implode. You'll either crash hard or print more money, perhaps crashing even harder. The US has done OK in making adjustments, because they just need to nudge it this way or another. China has meddled much more deeply in the economy, creating a lot more risk for a hard crash in the near future.
It makes more sense in Switzerland because it's small. America is huge. There is no land shortage outside of a few urban areas. It makes some sense in San Francisco, but crazy property prices (when compared to wages) are a largely national phenomenon.
Switzerland has a lot of open space also...it isn't so dense.
The key point is stability: housing prices really shouldn't fluctuate much outside of abnormal conditions. So even if they are high, as long as they are stable, then you at least feel ok about taking that loan out if you can.
The problem is that many see real estate as an investment and an opportunity to get rent. That does nothing for the economy, and at least property taxes work against that (Swiss takes that to the next level with a rental tax, even if you don't rent your house).
>You can claim that the Chinese financial system is immune to economic cycles and that the law of gravity doesn't apply.
That right there is the fundamental flaw in your thinking. You think boom and bust is physics. It's not.
(Here we go again, for like the 50th time explaining how this stuff works)
It's a direct consequence of the fractional reserve banking model that sticks the taxpayer with the bailout. In China, the government just prints the money electronically. They've had trillions in bad loans in the banking system forever and the Chinese gov periodically goes and cleans it up with printed money and shoots a few misbehaving bankers. In the west, we make the taxpayer and savers pay 100 cents on the dollar on the bad loans and transfer wealth from them to the bankers. We also take everyone's property and give it back to the bankers while China just lets all the bad loans sit in default forever without any action being taken. They even periodically let big investment funds default and it doesn't crash the financial system because the reverse money multiplier doesn't kick in like it does in the west because the gov just comes in and prints the money, hands it to the banks and they keep lending.
I've talked about this with my colleagues at work a lot. There are only a couple of ways out of this mess:
1. An assets crash, turning who were winners (the speculators) into losers. Is there really a reason for that 90 sqm apartment in Beijing to be worth $1 million when it can only rent for 9000 RMB a month?
2. Significant inflation with the RMB, keeping the (well connected, mostly middle class) winners as winners, and turning everyone else who wasn't speculating into losers. Keep in mind that a vast majority of the Chinese population has saved lots of RMB and isn't exposed so much to assets (though they would like to be).
We, like you, think that 2 might be a possibility. Hence my need to transfer my RMB into USD and get it out of the country. Likewise, those who know better than me have been more aggressive about getting out of the RMB, as the article states (I had to go through and get tax receipts, income statements, and a bunch of other hoops to do my transfers). 1 is still a possibility also, which means getting into real estate (the only investment for us mere mortals) is very risky.
And just because you can print your way out of a crash doesn't mean the crash hasn't happened. It sucks when the US does this with its freely convertible currency, it is even worse when/if China does this with its nonconvertible currency.
Here's the twist. What if they build a ton of houses and get the second tier cities hooked up to infrastructure such that they create housing booms further inland at the expense of costal property. New capital is always being created and developed and the central planners in China aren't that bad at this. You just have a different set of winners this time around with the marginal profitability of Shanghai slowing down in favor of the Inland cities.
In the US urban infrastructure is garbage outside of a few major metros so all the money piles into those and the rest is is ignored and then bubbles and pops. China actually does development like they mean it and is expanding out thousands of miles of roads and trains building out new markets so the new money injected can find a way to profitably invest itself.
So my wife lives in Chenzhou, which is a small inland 3rd/4th tier city by Chinese standards; we visit sometimes. Speculators will speculate, and there is a huge surplus of apartments as a result, with no hope anytime soon of really selling them off and putting them into use...new capital wasn't created, it was just sunk into these buildings. They won't create new capital until they are occupied, those people with jobs doing things to create value. Just building them doesn't create capital. It does create jobs for migrant workers, which I guess is the primary goal.
And the houses are poorly constructed concrete monstrosities, no central heating (I hate visiting in the winter). You just can't help but think they'll be torn down in 10 or 20 years before they are actually used. Even in Beijing, an apartment building built 5 years ago would be considered decrepit by western standards. I was looking for a new apartment to rent and came away thoroughly depressed...the prices were high sure, but there was nothing even close to what I wanted anyways. So I stayed put in my current flat, whose rent hasn't gone up in the 3 years I've been renting it.
Chinese urban infrastructure would love to have US urban infrastructure problems. Trains are wonderful, roads are great also if you want to cut down on 10-day long traffic jams. But they are nowhere near the states in terms of infrastructure, and much of it are white elephant projects that will never contribute to the economy in any meaningful way.
I believe you that the construction probably isn't great, but how does it compare to living out in rural areas, or wherever people moving to the cities used to live? There are still a lot of Chinese who are not urbanized and all this building should be a step up for them.
Those apartments are being bought by speculators, not urbanizing farmers. Those farmers can't really afford these apartments though, nor can they send their kids to local schools even if they buy them (China hasn't reformed the huko system yet). So they come to the cities as migrant workers, leaving their families behind, living in cheap dormitory accommodations or even in basements (lookup "ant tribe"). China will have to sort out this imbalance before urbanization can drive much of the economy, and speculation doesn't really help here (maybe they could eventually afford a $200k apartment, but $1 million? Really?)
It's illegal in Australia for foreigners to buy existing homes though, so what they buy are off-the-plan units, and (from what I can tell) significantly (double-digit percentages) overpriced compared to existing stock, or even smaller developments that don't cater to foreigners as explicitly. Many of them seem to be bought to rent out, with the idea of living in them 'occasionally' or 'sometime'. I wonder how many of these investments make financial sense. (then again, just for portfolio diversification it's worth even paying for, maybe that's where the price excess comes from).
It's an interesting economic dynamic, in-explainable with orthodox theory, it's really about the circumstances. Which makes it difficult to analyze and model, too.
To be fair, recent mainland Chinese immigration has enlivened a lot of otherwise dead areas of Sydney, and I'd wager Melbourne. Places that were ghostly failed malls are now thrumming 24 hour apartment-ringed nexus for food and entertainment. (Eg. Chatswood.) A similar transformation has permanently improved central Auckland. Smiles from China, where I now choose to live ... a Sydney native.
I worked in Chatswood for 4 years and the amount of development that went up (or finished) was incredible! Right around the Chatswood station there are 3 or 4 new high rise apartment buildings. All the new shops that opened up were a boon for lunch time offerings :)
Mostly investment properties as far as I can tell, renting to students, singles, that kind of thing. So fairly mobile renters, they commute to where they need to be.
This is the "Great Blowing Sound". Ross Perot's "great sucking sound" in reverse. All that money we sent out the trade deficit is flooding back in to real assets in the U.S and elsewhere in the western world.
Where would you like your money - in a country with tight capital controls, an unstable political hierarchy, unclear or unreliable economic data and lack of "institutions" or ... China
Of note is that the recent rise in price of Bitcoin is in a large part due to this outflow of money from China. This article totally left that channel out.
It's not a coincidence it's all happening simultaneously globally. For the same reason, every GDP on earth simultaneously skyrocketed (priced in dollars) as the dollar lost value in 2002/03, as the US Government began running large budget deficits under Bush.
It's causing the mess in China to get worse, by pulling capital out of China more rapidly. It crashed Brazil (check out when their unemployment began to soar, exactly when the dollar run began [1]). It crashed Canada and also hit Australia hard. It caused Russia to lose 1/3 of its economy, and is bleeding off their reserves and emergency fund; and the worst isn't over yet. The strong dollar ended the USSR by tanking the price of oil, and caused their crisis in 1998 as well.
The same thing happened in Asia in the late 1990s, when the strong dollar crashed numerous economies there. This time is worse in terms of sheer damage, as those Asian economies are far larger today (as are Canada, Australia, Russia and Brazil).
Every day the dollar remains strong, things will get better for the US and worse for almost everyone else. It has already pulled trillions in capital back to the US, and has boosted real US annual purchasing power by at least $2 trillion in just 18 months. The US has gone from #9 or #10 in the world in GDP per capita in 2014, to #5 on the IMF's projections for 2015, due to the dollar.
It seems like the media has been trying to will a crash in global markets to happen with the amount they've been going on about this.
How biased are their opinions and what do more neutral experts say about the direction the global economy is heading? Honest question as I am not an expert.
They are reporting facts, really it is as simple as that. People are moving money out of China (I'm one of them), confidence in the economy is not good even if the government says everything is completely spiffy. Bloomberg doesn't have to make anything up to talk about how people are moving money out of China, they just need to follow the money. And if the money is flowing one way, it is completely reasonable to speculate on "why" that is so, and I think it is obvious (confidence is low, better investment opportunities exist abroad then what can be done with the money at home).
Thanks for the clear and logical explanation. I find it hard to trust the news in this day and age so always interested in other opinions on the biases of the publisher itself.
Bloomberg tends to be pretty good on this kind of story. If they say the money is moving, they are almost certainly right. If they say how much is moving, they are probably somewhere in the neighborhood. If they say how it's moving, it's probably moving in at least those ways. If they say why it's moving, their guess is as good as anybody else's, and maybe better.
I feel the same cynicism. But then I remember cynicism !== intelligence. I'm trying to actively cut down on my news, while keeping a few channels open (HN/geopolitics/basketball..), in order to become less of a cynic..
Generally I would agree, but what if your cynicism limits you from taking that one high risk opportunity that could make a serious impact on your financial future? I mean we're all start up junkies here (for the most part) would that not be considered a high risk activity that would be avoided by any serious cynic?
I would also make the argument that the majority of the population (myself included) would not benefit from participating in economic activities requiring cynicism. I think financial literacy for most people is a 'learn it yourself' affair that most people choose not to do, and therefore they should avoid the financial world like the plague.
Be as naive as you want in the cushy world of low risk, low yield, investments. Happier lifestyle I'd wager.
Are the tables rigged or not? Going in as an optimist into a scam will surely be a bad thing.
Living in China, I've learned to appreciate fair financial systems. Many investments I wouldn't have considered in the states before now look like really good deals, simply because they are much more "fair" than what is available to me in China.
China has no low risk/low yield investments beyond long term savings accounts that don't even beat inflation. That is why so much money was rushing into the stock market, and now again, real estate. Because literally there isn't anything else (ok, maybe some undergound banking deals, but do you want to deal with the mafia?).
When your future economic well being depends on reading tea leaves, you better be reading tea leaves (pay attention to the news). You can't just put your head in the sand.
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.