China’s Outflow of Capital
Wealthy Chinese families are increasingly trying to move large sums of money out of the country, worried that the value of the Chinese currency will fall further and their savings will be worth less. Over the last year and a half, individuals and companies have moved about $1 trillion out of China. Those outflows have been partly offset by money coming in from the trade surplus.
There are various methods, legal and otherwise, to move capital out of China:
- Finding “Smurfs”
Chinese citizens who want to send more than $50,000 — the allowable limit — out of the country can arrange for relatives or friends to exchange money for them
- Buying overseas businesses
Businesses and wealthy families can spend up to $1 billion on acquisitions with minimal scrutiny
- Buying life insurance
By purchasing a policy denominated in American dollars, and paying for it in Chinese renminbi, individuals can take money out of the country, although China is tightening limits on this
- Tinkering with trade
A company that exports goods declares only a fraction of the goods’ value to the authorities. An overseas buyer wires money to China for that fraction, and puts the rest of the money into the exporter’s overseas bank account. This dubious practice is known as under-invoicing exports.
The outflows are putting significant pressure on the Chinese yuan. The Chinese central bank is fighting the downward pressure by purchasing large sums of yuan, selling dollars from its currency reserves to do so. China’s reserves decreased by $108 billion in December and by an additional $99 billion in January, to $3.23 trillion. A year and a half ago, they stood at $4 trillion.
China’s central bank governor said there was no basis for continued depreciation of the yuan as the balance of payments is good, capital outflows are normal and the exchange rate is basically stable against a basket of currencies. Zhou Xiaochuan also dismissed speculation that China planned to tighten capital controls and said there was no need to worry about a short-term decline in foreign-exchange reserves, adding that the country had ample holdings for payments and to defend stability.
However, some of the biggest names in the hedge-fund industry are taking large bets against China’s currency. They believe the Chinese government will have no choice but to devalue the yuan by at least 20% to stem the capital outflows and to provide a much needed boost to the economy.
This uncertainty about the future direction of the Chinese currency has been one of the main causes of recent volatility in financial markets. A significant devaluation of the yuan will make Chinese goods cheaper to the rest of the world but will add to the deflationary pressures currently being experienced globally due to lower oil and commodity prices. So although a weaker yuan may benefit China, it may negatively impact the growth rates of other economies which is causing concern for markets.