China Trying to Halt Capital Outflows, Market Bears “Smell Blood”
China’s increasingly aggressive measures to clampdown on capital outflows has not gone unnoticed by US hedge-fund manager Kyle Bass.
Mr. Bass is famed for his successful bet against the US housing market in the global financial crisis of Y’s 2007-2008, so markets monitor his comments closely.
He argues the RMB Yuan is set to fall 30% Vs the USD, and he sees capital outflows as backing his view.
“China’s capital outflows are worse than they appear, which is why the government has allowed the RMB to depreciate over the last two months,” Mr. Bass said recently.
“We believe this pressure will continue with the prospect for higher interest rates in the US.”
China is trying to tighten its grip on capital outflows after a slide in the RMB Yuan this year of almost 6%, which has pushed the currency down to marks last seen more than 8 years ago and revived memories of a wave of capital flight late last year and in January.
China’s Vice Finance Minister Zhu Guangyao was quoted Saturday as saying policymakers were watching capital outflows closely.
Bank of China, the country’s biggest currency trading bank, has begun to sharply limit corporate customers’ ability to purchase foreign exchange in Shanghai. Customers who insist on buying foreign currency are being restricted to $1-M, compared with no caps previously.
Among other moves, the State Administration of Foreign Exchange (SAFE) is vetting transfers abroad of $5-M or more, down from $50-M previously, and is stepping up scrutiny of major outbound deals.
The RMB Yuan slumped to more than 6.92 per USD in late November before suspected state-directed intervention gave the currency a lift. It was trading at 6.8815 Monday.
The slide has sparked a flurry of bets against the currency to their most since January, at the tail end of China’s 2015 financial crisis.
Wall Street Forex traders say buying the USD against the RMB Yuan is its #2 recommended trade for Y 2017, after bets against the GBP and EUR. Since the RMB Yuan is closely controlled onshore, it suggests buying the Buck against the RMB Yuan in 12-month forward contracts offshore.
The 1-year non-deliverable forward contract currently prices the RMB Yuan at 7.1 per USD.
Most speculative trade in the RMB Yuan takes place offshore given China’s capital controls. Aside from derivatives markets and ETFs, speculators invest in assets of economies with heavy trade exposure to the country, like the Australian or Taiwan dollars and Hong Kong listings of Chinese mainland companies.
Illicit capital outflows have increased as a concern for the government this year as it attempted to put the economy back on track and keep the currency stable without unduly draining its massive currency reserves of more than $3-T.
Chinese regulations grant individuals an annual foreign exchange quota of $50,000 a year, a factor on the radar of markets as Y 2017 looms.
A survey by the Hurun report, a monthly magazine best known for its “China’s Rich List,” showed 60% of wealthy Chinese planned to buy property overseas in the next 3 years.
Many individuals move larger sums offshore by tapping relatives’ quotas and companies also sneak huge amounts of cash offshore through fake invoicing.
In October, foreign exchange reserves slumped more than $45-B, the most since January’s end of China’s stock market crisis. November data is due Wednesday.
Although the fall in reserves in October was seen as reflective of the RMB Yuan’s declining value, a researcher at the PBOC (central bank) warned the slide and capital flight could feed off of one another.
“Depreciation triggers capital flight, and capital flight exerts even bigger pressure on the yuan,” Wang Zhenying, head of the Statistics and Research Department of the People’s Bank of China’s (PBOC) Shanghai Head Office, said in an interview.
“Therefore, it’s necessary to break this feedback loop,” he said.
Analysts say there are fundamental reasons suggesting the RMB Yuan should fall.
While economic growth has steadied this year at around 6.7%, it is seen sliding next year. The International Monetary Fund (IMF) forecasts growth of 6.2% in Y 2017.
Still, the RMB Yuan is falling alongside other EM (emerging market) currencies in the face of the USD that is surging on expectations of higher interest rates as Donald Trump moves to lift the US economy.
China’s relationship with the United States is now very uncertain.
Donald Trump has promised to name China a currency manipulator on his 1st day in office in January and to impose a 45% import tariffs on Chinese goods.
He prompted protests from China at the weekend by speaking by phone Friday with Taiwan’s President, something no previous US President had done since the United States switched its diplomatic recognition to China from Taiwan in Y 1979 under Jimmy Carter.
Investors say the pressure on the RMB Yuan is not nearly as extensive as it was late last year when a stock market slump and surprise devaluation of the RMB Yuan raised fears that the economy was in worse health than Beijing said.
Concerns about China’s “debt mountain” have also eased this year and the government has underpinned economic growth with a massive stimulus effort.
China has also kept the RMB Yuan largely stable in trade-weighted terms, although analysts said that may be lost on many Chinese who tend to focus more on the USD rate.
“When you know your currency is going to be weaker, there is going to be a desire to try to take advantage of that or to try to hedge, so the desire to get dollars will still be there. It is natural to see these kinds of capital outflows,” PIMCO said.