Sunday, December 18, 2016

Reuters — As yuan weakens, Chinese rush to open foreign currency accounts

Zhang Yuting lives and works in Shanghai, has only visited the United States once, and rarely needs to use foreign currency. But that hasn’t stopped the 29-year-old accountant from putting a slice of her bank savings into the greenback.
She is not alone. In the first 11 months of 2016, official figures show that foreign currency bank deposits owned by Chinese households rose by almost 32 percent, propelled by the yuan's recent fall to eight-year lows against the dollar.
The rapid rise - almost four times the growth rate for total deposits in the yuan and other currencies as recorded in central bank data – comes at a time when the yuan is under intense pressure from capital outflows. The outflows are partially a result of concerns that the yuan is going to weaken further as U.S. interest rates rise, and because of lingering concerns about the health of the Chinese economy.
Reuters
As yuan weakens, Chinese rush to open foreign currency accounts 
Winni Zhou and John Ruwitch | SHANGHAI

15 comments:

Matt Franko said...

" In the first 11 months of 2016, official figures show that foreign currency bank deposits owned by Chinese households rose by almost 32 percent,"

Yeah no shit!

I keep trying to tell you they are USD zombies... complete disgraced nation...

Trump has to wean them off the USD.... for their own good...

Tom Hickey said...

Domestic "capital flight." Chinese people are holding USD accounts at China banks and shorting the CNY against the USD in expectation of a falling RMB. Eventually those positions will be covered since people can't spend USD in China.

(CNY or Chinese yuan is the unit of account. RMB or renminbi is the Chinese currency. The RMB is denominate in CNY).

It's not actually capital flight since the USD are just numbers in an account in a Chinese bank and don't affect the balance of payments. In actual capital flight, a Chinese bank account would be debited and a foreign account would be credited, which would affect the balance of payments. This would take place when Chinese nationals purchase US RE for example.

Matt Franko said...

Well then if they remove the peg they are for sure all going to get blown out...

They are thinking that because the US is raising rates this will make the US currency go up.. along with most others...

If the US keeps raising and increasing USD interest income, then the China producers will get some pricing power back in USD terms and the yuan will go UP vs USD as China producers get higher prices in USD terms...

Tom Hickey said...

US rate rises increase interest payments on new US tsys and IOR. These are a fiscal add that imparts an inflationary bias at or near full employment. In the case of inflationary expectations, the USD will fall relative to other currencies, cet. par.

But this depends on how close to full employment the US is and also external conditions.

There are a lot of factors in play as well as a lot information that is not known, e.g, what the US output gap actually is, so predicting how things will go is a crap shoot.

There is also the issue of what conditions really are in China. Most of this involves guessing.

My sense is that the USD/CNY is pretty close to actual value and if China were to float, as Russia did, the effect would stabilize pretty quickly. The RUB took a hit owing to the double whammy of lower oil price/Dutch disease and the imposition of sanctions. The initial discount was too steep and the RUB quickly recovered by about 50% pretty quickly.

There is nothing like that going on with China, so if the CNY did take a hit it would likely be too big a discount relative to fundamentals and it would recover quickly and stabilize at about here it is now.

A floating currency is potentially a lot stronger than a pegged one, and it would add credibility to the RMB, while returning currency sovereignty to China.

The 10 yr is about 3.4% there now and would probably come down. The yield curve pretty flat, indicating low inflationary expectations.

I don't know what China is waiting for. They are going to have to do it at some point.

Jose Guilherme said...

In actual capital flight, a Chinese bank account would be debited and a foreign account would be credited, which would affect the balance of payments.

What needs to be made clear is that so-called "capital flight" never affects either the current account of the balance of payments or the net international creditor or debtor position of a country.

If a Chinese company or individual sells yuans for dollars in China and then tranfers them to a bank account in the U.S. (say, at Citibank), a dollar deposit is now owed by Citibank to an entity residing in China, meaning that in BoP terms there is still a liability of the U.S. vis-à-vis China.

Thus - abstracting from possible valuation changes of assets and liabilities - the net international creditor position of China can only be reduced if China starts having current account deficits.

Tom Hickey said...

Good point Jose.

The point the author of the post was making in distinguishing domestic "capital fight" by holding foreign denominated accounts at a Chinese bank and actual capital flight involving depositing the foreign currency in a foreign bank is that the people doing this domestically are hedging against RMB depreciation and don't ever expect to spend the foreign currency. On the other hand, when foreign currency is deposited in a foreign bank, the intention is generally to use it abroad.

With respect to China specifically but also Russia, this is typically through purchase of RE abroad. Russians are fond of London while Chinese tend to prefer the West Coast of the US and Canada. Chinese nationalists have dumped over 1T USD into the US and they have also driven up prices in Vancouver.

IN both cases of so-called capital flight the issue is currency revulsion. It's not a good sign when citizens of a country don't want to hold the county's currency or assets denominated in the currency. This is China's challenge on the way toi liberalizing its currency, which it must do to achieve currency sovereignty in a global financial system.

Jose Guilherme said...

Tom,

I certainly agree that it's not a good sign when citizens do not wish to hold their own country's currency.

In any case, if dollars deposited by Chinese citizens at U.S. banks are used to purchase U.S. Real Estate or other assets that still would not affect China's net creditor position.

If those dollars are used to purchase U.S. goods/services, however, then China's current account will be impacted - and its net creditor postion correspondingly reduced.

Plus, U.S. GDP would get a boost.

Maybe that is one of Trump's objectives?

Tom Hickey said...

Right, but so far China's appetite as been for acquiring real assets, natural resources, and food products. China is pretty heavily invested in the US and would like to be more invested but the US is resisting that. The US is not chiefly a supplier of natural resources though. China does purchase a lot of food products from the US. There may be room for expansion there and that's what Ambassador-designate Branstad will be pushing as he did when governor of Iowa. China is also a consumer of US pharmaceuticals and entertainement.

China may be open to moving in the direction of balancing trade, but they will negotiate hard to get what they want. The American government cannot make US firms accept deals they don't want. And the US government cannot penalize trade without reason, like dumping, without running afoul of the WTO. And it's not sufficient to charge dumping. It has to be shown and China typically challenges.

I conclude that the negotiating is just beginning with Trump initially taking a hard line only to find China firing back strongly.

Another get reality show in the works. Should be interesting to watch.

China is moving into the position that US used to be in with the market that everyone wanted entry to. Now it's China, since that is were the growth is.

Tom Hickey said...

US firms were early investors in China and China has generally rewarded them, although China drives tough bargains.

Now threatened by Trump, China is saying to US firms doing business in China, "Nice company you have there. It would really be too bad if anything happened to it."

Neil Wilson said...

" In actual capital flight, a Chinese bank account would be debited and a foreign account would be credited, which would affect the balance of payments."

That can't really happen in a true floating rate system because it is just an exchange. For a chinese account to be debited another has to be credited - the person who owned the foreign currency previously.

Of course the Chinese maintain a dirty float, so it can because there is deletion of RMB in the process somewhere.


Neil Wilson said...

"I certainly agree that it's not a good sign when citizens do not wish to hold their own country's currency."

Amusingly it's actually really good is savings are held in another currency. Because that allows you to eliminate the deficit and make the numbers look good.

As we know, if you have 'dollarisation' you just need to put taxes up to release the necessary resources in your own currency.

But if you continue with 'Washington policy' you'll end up in a death spiral.

Bob said...

This is related to China's corruption crackdown, isn't it?

Tom Hickey said...

This is related to China's corruption crackdown, isn't it?

It's been mentioned as a factor.

The Rombach Report said...

"US rate rises increase interest payments on new US tsys and IOR. These are a fiscal add that imparts an inflationary bias at or near full employment. In the case of inflationary expectations, the USD will fall relative to other currencies, cet. par."

Tom - I think your take on the interest rate impact on the USD depends on the short term vs. long term view. Near term, rising interest rates creates demand for USD, which the market prices in. Over a longer time horizon, rising interest rates is a fiscal add, as you point out. So, the increased supply of USD should bias the currency downward. Right now the demand for USD from sharply higher interest rates is overwhelming the supply of USD from the fiscal add. However, at some point the supply of USD will supersede demand for it and the USD will fall.

Tom Hickey said...

Agree, Ed. The financial market is reacting to the rise, but the economy has yet to respond since the flows are not there yet.

Initially, this may create more of a demand for mortgages and refinancing as people expect higher rates in the offing. But more expensive borrowing is a dampening influence on RE over time, since RE is typically leveraged.