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Bears gather as China confronts new threat of capital flight

  • Author:naky
  • Source:www.diecastingpartsupplier.com
  • Release on:2015-09-10
Last month, Dalian Wanda, one of the most outward facing corporates in China, bought the organiser of the Ironman triathlons from a US private equity firm for $650m.

Meanwhile, Anbang Insurance, which has similar aspirations, looked less likely to succeed in its courtship of the Portuguese authorities in the hope of buying the remnants of a financial conglomerate in Lisbon — precisely because the Chinese already have purchased so many assets there. At the same time, Chinese tourists continue to flood destinations like Japan, purchasing luxury goods which are ever-more cheap as the Chinese currency appreciates, to sell them back home for a tidy profit.

It is hard to know what represents prudent diversification and what is capital flight by Chinese groups and wealthy travellers. But for those who track capital outflows from China, the distinction does not much matter. In the four quarters to the end of June, such outflows have totalled more than $500bn, according to data from Citigroup. China’s foreign reserves, once around $4tn, are down to less than $3.7tn and expected to drop further to $3.3tn this year.

Not long ago, the world seemed awash with cheap dollars. Many could be traced to the generous monetary policies of the Federal Reserve. But they also came from the mainland as Chinese recycled their dollar earnings from exports. Chinese capital flowed into farms in Africa, ports in Sri Lanka, energy companies in Canada and Treasuries in the US.

More recently China began massive, expensive initiatives including the Asian Infrastructure Investment Bank, the New Development Bank, its Silk Route projects and a recapitalisation of the two policy banks that help recycle its reserves.

“It is neither the sell-off in Chinese stocks nor weakness in the currency that matters most,” notes George Saravelos, a currency strategist at Deutsche Bank. “It is what is happening to China’s FX reserves and what this means for global liquidity. China’s actions are equivalent to an unwind of QE or, in other words, Quantitative Tightening.”

Such concerns are understandable. It is true Chinese foreign exchange liabilities now amount to some $1tn, according to the Bank for International Settlements. Allowing for foreign currency borrowed by the Hong Kong divisions of Chinese companies, the actual amount is as much as $1.5tn — 15 per cent of China’s gross domestic product or 4O per cent of its foreign exchange, Gavekal financial services company calculates. Moreover, the combination of a depreciating currency and deepening deflation in the country means the burden of servicing that debt has become more onerous.

By the formulas the International Monetary Fund has developed, (reflecting a percentage of debt, portfolio flows, exports and money supply) China needs at least $2.6tn in foreign exchange reserves, though the calculation assumes no capital controls. Meanwhile, Mr Saravelos adds, China has around $2tn of “non-sticky” liabilities including speculative carry trades, debt and equity inflows, deposits by and loans from foreigners that could be a source of outflows.

A combination of future Fed tightening, less money in need of recycling in the hands of oil producers and the uncertain consequences of the changing circumstances in China is enough to turn most bulls into fearful bears.