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K. Palonka: Yuan Outflow. Struggle of Peoples Bank of China to save RMB

According to the rules that were supposed to partly ease free currency movements in and out of China (maximum allowed equaled about 50 000 US$). If about 5 percent of the population – that is 65 million residents, each took the maximum allowed 50,000 US$ out of China that would wipe up the $3.3 trillion US$ of Chinese currency reserves. Terrifying prospect indeed!

Thus, after New Year Celebrations Peoples Bank of China (PBoC – Chinese central bank) would probably have to make a step backwards and impose a stricter control of capital flows. The world’s biggest foreign-exchange pool won’t be sufficient to defend the yuan.[1] The yuan has weakened 2.8 percent since China won reserve-currency status from the IMF at the end of November to 6.5797 a dollar. Pessimistic analysts predict further devaluation of RMB down even to 12%.

What actually has happened, and so suddenly, when a year or so ago Us FED has accused China for undervaluation of its currency? China is trying to do contradictory movements to modernize its financial and monetary system, That means maintain independent monetary policy ( in that case to keep interest rates low meaning  cheap loans ), a fixed exchange rate (to stabilize  currency reliance ) and allow free capital flows ( in ant out the country borders) all at the same time.[2]

Źródło: flickr.com

Source: flickr.com

Why does the outflow of capital emerge in China, just to cope with the last group of problems? Well the beginning was probably the panic on Chinese stock exchange. The government attempt to calm down China’s stock markets in July by banning sales by major shareholders (state owned or state dependent) and arming a state agency with 400billion US$   to support prices, suspending IPOs among other measures. It  showed  policymakers caught between the desire to embrace elements of capitalism and an instinct to slow down the  reforms when things go wrong.  As we see below major policy measures –six times interest rates cuts, stock exchange interventions, RMB devaluation did not help.  Quite opposite, it produced a lack of confidence and did not prevent investors to withdraw. Not only small but also big ones desperately tried to allocate they resources somewhere else.

Source: Bloomberg

Source: Bloomberg

China’s intervention in the stock market hurts the credibility of its efforts so far, and is fueling volatility in global markets by sending confusing signals about its intentions. There’s concern about the moral hazard of a hybrid system where investors assume the government will intervene in times of trouble. The support raises questions about the commitment of its leaders to move to a system where money is priced according to risk and allocated via independent forces, rather than channeled to support asset prices or state-owned enterprises at the government’s bidding.[3]

The luck of confidence  is magnified by shocking events such as the mysterious disappearance — and subsequent reappearance in January — of billionaire Guo Guangchang initiated by of still unidentified authorities , suggesting that private sector tycoons were being targeted by the Chinese president’s anti-corruption campaign. Mr Guo is the co-founder of the Shanghai-based Fosun Group, the country’s largest private conglomerate. ( Estimated fortune –about 7,8 blnUS$ ).Originally focused on China’s property, steel and pharmaceuticals sectors, he has more recently made a name as an aggressive outbound investor. The suggestion that party and government investigators might be turning their attention to the private sector has shocked the country’s business and investment community.

As a result, many are now , suspecting a potential clash of power and money. In effect as much as it is legally,   semi-legally and illegally  money is flowing out of China through various channels.

China Morning Post daily newspaper in Hong Kong has quoted after Xinhua   “At least 207 billion yuan (HK$245 billion) was channelled out of Guangdong last year in illegal money transfers – seven times as much as in 2014.  The money was sent in 83 cases of illegal transfers discovered by Guangdong security officials, with some of it being channeled to Hong Kong and Macau.  In one case a wanted corrupt official had sent 12 million yuan to Macau to use as gambling funds, Xinhua reported. Experts warned the cases were just the tip of the iceberg, and that the depreciation of the yuan and the mainland’s anti-graft campaign would hasten the flows of illegal money.

As we see below direct dependence of currency outflow and RMB depreciation is obvious.

Source: Bloomberg

Source: Bloomberg

China’s foreign-exchange reserves plunged by a record $513 billion last year to $3.33 trillion as the PBoC sold dollars to keep up the RMB. “Bloomberg Intelligence estimates that about $1 trillion of capital left the nation in 2015, underscoring the scale of the battle facing policy makers as they struggle to boost an economy growing at the slowest pace since 1990.”

“At the end of the day, the exchange rate should be driven by macroeconomic fundamentals”,  said Sue Trinh, the Hong Kong-based head of Asia foreign-exchange strategy at RBC. „The end game is these capital controls are inconsistent with China’s goal to internationalize the yuan. You’ve got to make a choice.”[4]

[1] Outflow of Chinese currency means subsequent devaluation of Yuan (RMB) to prevent it central bank is using dollar reserves to buy back RMB from offshore markets.

[2] It challenges Nobel-winning economist Robert Mundell’s “impossible trinity” principle, that insists: a country can’t maintain independent monetary policy, a fixed exchange rate and free capital flows all at the same time.

[3] Bloomberg quote from January 19th 2016

[4] DAVOS summit January 27 2016

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K. Palonka: Yuan Outflow. Struggle of Peoples Bank of China to save RMB Reviewed by on 9 lutego 2016 .

According to the rules that were supposed to partly ease free currency movements in and out of China (maximum allowed equaled about 50 000 US$). If about 5 percent of the population – that is 65 million residents, each took the maximum allowed 50,000 US$ out of China that would wipe up the $3.3 trillion US$

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