- The monthly average of outflows from China used to be $11 billion.
- In the first six months of 2014, $26 billion left China.
- In 2014, $134.3 billion left China.
- The Chinese government predicted about $455 billion in outflows for 2015.
- In October, the US Treasury estimated that capital outflows from China hit $500 billion in the first eight months of 2015.
Thursday, January 28, 2016
Not even the darkest minds imagined it would be this bad for China
That’s worse than even the most bearish China analysts could have even imagined.
A few numbers put this in perspective:
In other words, the situation has deteriorated very rapidly, and everyone got it very wrong. Last year, China’s foreign-exchange reserves dwindled for the first time since 1992. They fell by $513 billion to $3.3 trillion.
A Bloomberg News survey found that investors think that, this year, reserves will fall another $300 billion. Of course, that was taken before everyone knew how bad the 2015 outflow situation was.
The precarious situation comes at a delicate time for the country. China is undergoing the crucial transition from an economy based on investment to one based on consumption. It’s battling problems like debt and overcapacity, and growth is slowing. To deal with all of this, the government needs its reserves.
You can blame a good portion of this on the depreciating value of the yuan, which has spurred holders of the currency to ditch it for something more stable.
Analysts were also way too rosy on how that would shake out, though.
The yuan has depreciated around 5% against the US dollar over the last year, so, yeah, that $40 billion figure turned out to be a little low. At Orlik’s expected rate, outflows should’ve been about $200 billion.
In December, the government spent $108 billion to stop the yuan from falling too fast.
In September, star China analyst Charlene Chu — known for her bearish outlook on China’s credit and liquidity situation — wrote out a dark scenario on foreign-exchange reserve depletion. Her worst-case scenario saw outflows from September to December 2016 hitting $180 billion. For the full year of 2016, they would hit $540 billion.
If that played out, she posited, China’s liquid reserves would come to equal only 80% of the International Monetary Fund’s precautionary requirement.
Right now, even her estimates seem conservative.
Of course, the government has tightened capital controls — though businesses find ways to get around them.
But, more colorfully, it’s also started threatening and short-squeezing yuan traders into submission. In an editorial on Monday, the government said that traders shorting their currency should expect to suffer huge losses.
It even went as far as to warn legendary hedge fund manager George Soros, who famously squeezed the British pound, to stay away. Soros said that China was bound for a hard landing last week at the World Economic Forum in Davos, Switzerland.
This is how you know things are serious.