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.
EDIT: To clarify: "cash" refers to paper currency and coins; "dollar holdings" refers to dollar denominated assets.