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Cash Exiting China

Something that I have thinking about for a few weeks – and was reminded of reading Ryan Avent this morning – is the series of pieces at FT alphaville regarding the outflow of cash from China.  See here and here and here.  The thinking had been that the renminbi was a one-way bet as China moved forward with capital account liberalization as investors rushed to be part of the Chinese story.  The growing exodus of cash, however, is calling that story into question.

Moreover, I am interested in how much of the outflow is attributable to a generalized rush to safety as a result of the European crisis versus how much is attributable to capital flight due to a a deteriorating economic environment inside China itself.  I am reminded of this story from the Wall Street Journal earlier this year:

With a fortune of at least $1.6 million, Mr. Shi is part of the wealthy elite that benefited most from the Communist Party’s brand of capitalism. He is riding the crest of arguably the biggest economic expansion in history.

And yet, while the party touts the economic success of the “Chinese model,” many of its poster children are heading for the exits. They are in search of things money can’t buy in China: Cleaner air, safer food, better education for their children. Some also express concern about government corruption and the safety of their assets.

Domestic money in China will be the first to head for the exit – insiders will always know more than outsiders about the underlying economic conditions.  So the exodus of cash could indicate that the Chinese story is coming to a close – and that will have significant consequences for the global economy.  It is another signal that emerging markets will not be supporting global demand anytime soon.  I think the team at alphaville is right – this story is slipping under the radar while we all have our eyes focused on the farce in Europe.  But it could be the real game changer in the global economy.

This post originally appeared at Tim Duy’s Fed Watch and is posted with permission.

10 Responses to “Cash Exiting China”

BillGilliamMay 31st, 2012 at 6:19 pm

I presented in 1999 in Shanghai to a group (who seemed like thugs to me) from D'long, remember them? I spent over a week and at one point asked to visit with the accounting department and their chief, with a translator. It began to dawn on me, slowly, that the principal objective nothing more than to get authorization to get money out. I expressed this view to my "investor group", including a former head of Federal Mogul, and damn if I wasn't terminated while on a flight from Shanghai back to Paris. As it turned out, a favor. It's always seemed to me that every chinese I meet wants his money, his family, himself out. And I keep askn: why do so many want in? Just sayn: Plus ça change, plus c’est la même chose.

rodeneugenJune 1st, 2012 at 3:25 am

The most important economic process on the world economy is the slow but sure conversion of he RMB into an international currency. It not only will appreciate its value to more realistic level, but also open it to financial transactions. And it is quite obvious to what direction will this money flow. Probably not to Zimbabwe.

Mike RJune 2nd, 2012 at 3:23 pm

The downfall of Bo Xilai exposed the power struggle between the left wing and the modernists in China. The left side with Jiang Zemin, Zhou Yongkang (and Bo Xilai) is fighting the present leadership with Hu Jintao and Premier Wen Jiabao. The majority of the Chinese officials have sent family members abroad. A funny comment on the Sina Weibo microblogging site a few days ago stated that U.S. Ambassador "Gary Locke is the only official in China whose family actually lives in China.”

Naturally, this struggle is increasing the capital flight from China.

SonnyJuly 2nd, 2012 at 5:16 pm

How will the flow of products from China be affected? What will the volume and the price of those products be? What will be the Macro effect here in the US? Just alot of questions and only speculation for answers. Help, answers somebody, please.

Mortgage loansJune 9th, 2013 at 1:28 am

huh? "Something that I have thinking about for a few weeks – and was reminded of reading Ryan Avent this morning – is the series of pieces at FT alphaville regarding the outflow of cash from China. "

- i haven' seen it yet.

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