Time running out for China on capital flight, warns bank chief
'The Chinese have not been very convincing. There is a perception that the renminbi could weaken drastically,' warns the Institute of International Finance
By Ambrose Evans-Pritchard
'The Chinese have not been rigorous and they have not been very convincing' Photo: Bloomberg
China is rapidly losing the confidence of global lenders and capital outflows risk turning virulent if the current policy paralysis continues, the world’s top banking body has warned.
“There is a perception that the renminbi could weaken drastically,” said Charles Collyns, a managing-director of the Institute of International Finance in Washington.
Mr Collyns said the authorities have so far failed to articulate a coherent strategy, and there are serious worries that outflows of capital could accelerate, broadening into a flood beyond Beijing's control.
“The Chinese have not been rigorous and they have not been very convincing,” he told The Telegraph.
Mr Collyns said China has already allowed the renminbi (yuan) to weaken against the country’s new trade-weighted basket of currencies, stoking suspicions that the recent shift from a crawling dollar-peg to a more opaque foreign-exchange regime is really a cover for devaluation.
The IIF, the chief global body for the financial industry, calculates that capital outflows from China reached $676bn last year. The central bank has been burning through foreign exchange reserves to offset the bleeding and shore up the currency, culminating in intervention of $140bn in December, by some estimates.
A big drop in the yuan would send a deflationary shockwave through a fragile world economy already on the cusp of a debt-deflation trap, and do so at a time when the eurozone and Japan are actively driving down their currencies. It would risk a pan-Asian currency storm along the lines of 1998, but on a much bigger scale.
China is not just another country. Its fixed capital investment has been running at $5 trillion a year, matching the combined total of North America and Europe. This has led to excess capacity across swathes of industry that casts a shadow over the entire global system.
Chinese officials insist solemnly that the new basket rate is the “decided policy of China” and will be upheld come what may, but concerns are mounting that they may be overwhelmed by market forces.
The crucial question is whether the exodus of money is chiefly a one-off move by Chinese companies and investors to pay off dollar debt - and to unwind "carry trade" positions in dollars – as the US Federal Reserve raises interest rates and drains liquidity. If so, the outflows are largely benign and should make the world’s financial system safer.
Mark Tinker, head of equities for AXA Framlington in Asia, said the bulk of the outflows are to pay off liabilities. “Chinese corporates are issuing corporate bonds in record quantities and using the capital to restructure their balance sheets, both onshore and offshore. This is not capital flight, it is asset liability matching, both duration and currency. It is a good thing being presented as a bad thing,” he said.
The IIF’s Mr Collyns, a former assistant US Treasury Secretary, is less sanguine. He calculates that total dollar debt in China peaked at roughly $1.5 trillion in late 2014, if all forms of exposure are included. “We think they have paid off a third of this. Half of the outflows are to repay dollar debt,” he said.
“What is worrying is that there could be a broadening of the outflows. There has been a surge in 'errors and emissions' and this is ominous. A lot of this is a capital outflow below board through inflated trade invoices and other forms of subterfuge, and some of it is ending up in the London property market,” he said.
Mr Collyns said there is no guarantee that the outflows will slow even if all the dollar debt is paid off since Chinese companies may start taking out "long" dollar positions (short renminbi) in the currency markets if they fear that Beijing is losing control.
“The Chinese have to restore confidence by pushing through reforms. There must be greater transparency in fiscal and monetary policy, and they must tackle excess industrial capacity. At the moment they won’t impose losses on anybody,” he said.
The warnings come as China’s $3.3 trillion foreign reserves fall to the bottom end of the safe band under the International Monetary Fund’s measure of reserve adequacy (ARA).
These reserves are relatively low by emerging market standards, given that Beijing is trying to defend a semi-fixed exchange rate and do so within a framework of heavy capital flows. The Philippines, Thailand, Peru, Brazil, India and even Russia score higher.
The IMF recommends a band of 100pc to 150pc under its complex ARA measure. China is currently near 120pc and almost certainly fell further in January.
Societe Generale said the safe level for China is $2.75 trillion. After that Beijing will lose operational flexibility. The country has roughly $600bn left – at the most – before it finds itself in a very uncomfortable situation. “They haven’t got as much headroom as people think,” said Albert Edwards, the bank’s global strategist.
Mr Edwards said the central bank is automatically tightening monetary policy as it runs down reserves, adding to the growing threat of bad loans in the banking system. “This is not something that can continue for very long. If they resist downward pressure on the currency, they will shrink the money supply,” he said.
“All of the indicators we’re look at from the housing market and fiscal stimulus say the economy should be bottoming out. The surprise is that the Chinese data is still so weak. That is worrying. The risk is that they will snatch a hard-landing from the jaws of recovery,” he said.
The IIF, the chief global body for the financial industry, calculates that capital outflows from China reached $676bn last year. The central bank has been burning through foreign exchange reserves to offset the bleeding and shore up the currency, culminating in intervention of $140bn in December, by some estimates.
A big drop in the yuan would send a deflationary shockwave through a fragile world economy already on the cusp of a debt-deflation trap, and do so at a time when the eurozone and Japan are actively driving down their currencies. It would risk a pan-Asian currency storm along the lines of 1998, but on a much bigger scale.
China is not just another country. Its fixed capital investment has been running at $5 trillion a year, matching the combined total of North America and Europe. This has led to excess capacity across swathes of industry that casts a shadow over the entire global system.
Chinese officials insist solemnly that the new basket rate is the “decided policy of China” and will be upheld come what may, but concerns are mounting that they may be overwhelmed by market forces.
The crucial question is whether the exodus of money is chiefly a one-off move by Chinese companies and investors to pay off dollar debt - and to unwind "carry trade" positions in dollars – as the US Federal Reserve raises interest rates and drains liquidity. If so, the outflows are largely benign and should make the world’s financial system safer.
Mark Tinker, head of equities for AXA Framlington in Asia, said the bulk of the outflows are to pay off liabilities. “Chinese corporates are issuing corporate bonds in record quantities and using the capital to restructure their balance sheets, both onshore and offshore. This is not capital flight, it is asset liability matching, both duration and currency. It is a good thing being presented as a bad thing,” he said.
The IIF’s Mr Collyns, a former assistant US Treasury Secretary, is less sanguine. He calculates that total dollar debt in China peaked at roughly $1.5 trillion in late 2014, if all forms of exposure are included. “We think they have paid off a third of this. Half of the outflows are to repay dollar debt,” he said.
“What is worrying is that there could be a broadening of the outflows. There has been a surge in 'errors and emissions' and this is ominous. A lot of this is a capital outflow below board through inflated trade invoices and other forms of subterfuge, and some of it is ending up in the London property market,” he said.
Mr Collyns said there is no guarantee that the outflows will slow even if all the dollar debt is paid off since Chinese companies may start taking out "long" dollar positions (short renminbi) in the currency markets if they fear that Beijing is losing control.
“The Chinese have to restore confidence by pushing through reforms. There must be greater transparency in fiscal and monetary policy, and they must tackle excess industrial capacity. At the moment they won’t impose losses on anybody,” he said.
The warnings come as China’s $3.3 trillion foreign reserves fall to the bottom end of the safe band under the International Monetary Fund’s measure of reserve adequacy (ARA).
These reserves are relatively low by emerging market standards, given that Beijing is trying to defend a semi-fixed exchange rate and do so within a framework of heavy capital flows. The Philippines, Thailand, Peru, Brazil, India and even Russia score higher.
The IMF recommends a band of 100pc to 150pc under its complex ARA measure. China is currently near 120pc and almost certainly fell further in January.
Societe Generale said the safe level for China is $2.75 trillion. After that Beijing will lose operational flexibility. The country has roughly $600bn left – at the most – before it finds itself in a very uncomfortable situation. “They haven’t got as much headroom as people think,” said Albert Edwards, the bank’s global strategist.
Mr Edwards said the central bank is automatically tightening monetary policy as it runs down reserves, adding to the growing threat of bad loans in the banking system. “This is not something that can continue for very long. If they resist downward pressure on the currency, they will shrink the money supply,” he said.
“All of the indicators we’re look at from the housing market and fiscal stimulus say the economy should be bottoming out. The surprise is that the Chinese data is still so weak. That is worrying. The risk is that they will snatch a hard-landing from the jaws of recovery,” he said.
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