
China's Money Exodus - cdnsteve
http://www.bloomberg.com/news/features/2015-11-02/china-s-money-exodus
======
fspeech
Why is it called an exodus? Other than the central bank selling dollars, for
every yuan that is sold there is a buyer on the other side.

Let me try a different narrative that could be equally valid: as the oil price
has halved the Chinese are getting a subsidy of 150 billion dollars a year.
Coupled with other commodity windfalls, the regular trade surplus, and a
domestic slow down that reduces the potential return on domestic investments,
they have cash busrting their wallets and must seek alternatives. Overseas
investment (a.k.a. the money exodus) is the only way to keep the accounting
identity true.

~~~
fspeech
Let me add that the accounting identity I am referring to is that the trade
surplus must be balanced the capital outflow. Since it is an identity it must
be true in the past as well. It is just that in the past the private sector
(on a net basis) was not very interested so it was the central bank that
controlled all outbound investments. And as a result the PBoC has a very large
and visible holding of foreign reserves. Now the time has come that the
private sector and individual Chinese want to invest the surplus themselves
and maybe then some so we see the central bank's reserve holdings falling. At
this stage the central bank may be happy to just get rid of some of their
excess holdings (also if they don't intervene and let the exchange rate fall
they will get even more squawking and name calling overseas). But if it
persists to the degree that the central bank runs out of reserves it will be
forced to stop intervening in the forex market and then the exchange rate can
fall as much as the market wants to, which by the way will make the trade
surplus even larger.

~~~
seanmcdirmid
The private sector wasn't "not very interested", they were required to sell
their dollars to the central bank for RMB. They just were not allowed to hold
dollars inside the country. That money was then taken out of circulation by
buying US treasuries (what else could China do with it?).

There was a time when China wanted to get rid of some of their USD holdings,
so they encouraged companies to take RMB, buy dollars, and invest abroad. But
taken to an extreme, eventually China runs out of reserves, has to buy dollars
on the open market to satisfy demand, and that leads the RMB to de-valuing as
they print more to buy dollars.

China still has to buy most imported commodities using dollars...like oil. A
de-valued RMB will most certainly lead to inflation at home, causing prices to
rise. And then Chinese will start hoarding dollars if they lose confidence in
the RMB, leading to a sort of death spiral.

At this time, China wants to keep money in China, and so is cracking down on
banks exchanging to USD too easily. Capital controls are a real thing.

~~~
fspeech
I assume that by saying "China still has to buy most imported commodities
using dollars...like oil" you are implying that China won't have enough money
to buy oil. You do realize that is a direct contradiction to a large trade
surplus, right? Or are you predicting that the trade surplus will soon turn
into a deficit? If RMB goes into the so called "death spiral" which direction
do you think that will push China's trade position?

~~~
seanmcdirmid
I'm saying that China needs dollars to run its economy, not having dollars
anymore can make it harder to run.

> If RMB goes into the so called "death spiral" which direction do you think
> that will push China's trade position?

China can't continue being the world's cheap factory. It is horrible for the
environment, and it doesn't do as much for normal people as it used to. Say
stuff from China is cheaper...so what? Americans and the west win, because
China continues to subsidize their wasteful lifestyles, but what does China
win? More trade isn't the answer anymore, eventually people actually want to
buy things and not just sell them.

And honestly, I'm not a trade position.

------
markdown
Fijian here. As of a year ago, foreigners are no longer permitted to buy
_residential_ properties within town boundaries.

Outside of town boundaries, they can buy residential property but must build
on it within 2 years, spending at least USD$125k on the home. Failure to do so
attracts a penalty of 20%(off the top of my head) of the value of the property
annually.

The chinese were just buying up too much property and locals couldn't compete.

------
landryraccoon
It's a shame property taxes aren't higher. It would be a free ride from the
perspective of domestic tax payers.

If one wanted to be protectionist, the increased taxes could be set to only
apply to non owner-occupied residences.

~~~
seanmcdirmid
Chongqing and Shanghai have tried this (applied property taxes to 2nd houses
for luxury properties). But that is easily gained by simply throwing in a
Smurf or two (put the house in a family member's name).

Any system with rules that can be gamed is not going to work in China. The
only solution is a tax on all property.

~~~
PakG1
_Any system with rules that can be gamed is not going to work in China._

Case in point: [http://world.time.com/2013/04/29/why-chinese-couples-are-
div...](http://world.time.com/2013/04/29/why-chinese-couples-are-divorcing-
before-buying-a-home/)

------
sharetea
Some relevant links:

"(Chinese bank's) nonperforming loans may be at 20 percent to 21 percent, or
even higher." [http://www.bloomberg.com/news/articles/2015-10-29/risky-
math...](http://www.bloomberg.com/news/articles/2015-10-29/risky-math-how-
analysts-calculate-china-s-true-bad-loan-burden)

"by 2018 all of China's excess reserves — cash that it has on hand to use
immediately — could be gone." [http://www.businessinsider.com/chinas-record-
capital-outflow...](http://www.businessinsider.com/chinas-record-capital-
outflows)

"China’s 42.2 trillion yuan (US$6.7 trillion) bond market is flashing the same
danger signs that triggered a tumble in stocks four months ago"
[http://www.thestar.com.my/Business/Business-
News/2015/10/10/...](http://www.thestar.com.my/Business/Business-
News/2015/10/10/If-you-think-Chinas-equity-bubble-is-scary-check-out-
bonds/?style=biz)

~~~
narrator
How long has this "China is about to crash" story been in the news? It's been
around for at least 10 years. There's an article almost every month. I should
write a big FAQ about why the Chinese financial system doesn't follow western
financial system rules and link to it whenever these articles come up.

~~~
seanmcdirmid
The economy can remain insane longer than you can remain solvent.

You can claim that the Chinese financial system is immune to economic cycles
and that the law of gravity doesn't apply. But we've heard that before about
American real estate, where people were saying "how long has this real estate
is about to crash story been in the news?" in 2007...

If everyone around you is talking about how to get money out of China, then
something might be up.

~~~
narrator
>You can claim that the Chinese financial system is immune to economic cycles
and that the law of gravity doesn't apply.

That right there is the fundamental flaw in your thinking. You think boom and
bust is physics. It's not.

(Here we go again, for like the 50th time explaining how this stuff works)

It's a direct consequence of the fractional reserve banking model that sticks
the taxpayer with the bailout. In China, the government just prints the money
electronically. They've had trillions in bad loans in the banking system
forever and the Chinese gov periodically goes and cleans it up with printed
money and shoots a few misbehaving bankers. In the west, we make the taxpayer
and savers pay 100 cents on the dollar on the bad loans and transfer wealth
from them to the bankers. We also take everyone's property and give it back to
the bankers while China just lets all the bad loans sit in default forever
without any action being taken. They even periodically let big investment
funds default and it doesn't crash the financial system because the reverse
money multiplier doesn't kick in like it does in the west because the gov just
comes in and prints the money, hands it to the banks and they keep lending.

~~~
seanmcdirmid
I've talked about this with my colleagues at work a lot. There are only a
couple of ways out of this mess:

1\. An assets crash, turning who were winners (the speculators) into losers.
Is there really a reason for that 90 sqm apartment in Beijing to be worth $1
million when it can only rent for 9000 RMB a month?

2\. Significant inflation with the RMB, keeping the (well connected, mostly
middle class) winners as winners, and turning everyone else who wasn't
speculating into losers. Keep in mind that a vast majority of the Chinese
population has saved lots of RMB and isn't exposed so much to assets (though
they would like to be).

We, like you, think that 2 might be a possibility. Hence my need to transfer
my RMB into USD and get it out of the country. Likewise, those who know better
than me have been more aggressive about getting out of the RMB, as the article
states (I had to go through and get tax receipts, income statements, and a
bunch of other hoops to do my transfers). 1 is still a possibility also, which
means getting into real estate (the only investment for us mere mortals) is
very risky.

And just because you can print your way out of a crash doesn't mean the crash
hasn't happened. It sucks when the US does this with its freely convertible
currency, it is even worse when/if China does this with its nonconvertible
currency.

~~~
narrator
Here's the twist. What if they build a ton of houses and get the second tier
cities hooked up to infrastructure such that they create housing booms further
inland at the expense of costal property. New capital is always being created
and developed and the central planners in China aren't that bad at this. You
just have a different set of winners this time around with the marginal
profitability of Shanghai slowing down in favor of the Inland cities.

In the US urban infrastructure is garbage outside of a few major metros so all
the money piles into those and the rest is is ignored and then bubbles and
pops. China actually does development like they mean it and is expanding out
thousands of miles of roads and trains building out new markets so the new
money injected can find a way to profitably invest itself.

~~~
seanmcdirmid
So my wife lives in Chenzhou, which is a small inland 3rd/4th tier city by
Chinese standards; we visit sometimes. Speculators will speculate, and there
is a huge surplus of apartments as a result, with no hope anytime soon of
really selling them off and putting them into use...new capital wasn't
created, it was just sunk into these buildings. They won't create new capital
until they are occupied, those people with jobs doing things to create value.
Just building them doesn't create capital. It does create jobs for migrant
workers, which I guess is the primary goal.

And the houses are poorly constructed concrete monstrosities, no central
heating (I hate visiting in the winter). You just can't help but think they'll
be torn down in 10 or 20 years before they are actually used. Even in Beijing,
an apartment building built 5 years ago would be considered decrepit by
western standards. I was looking for a new apartment to rent and came away
thoroughly depressed...the prices were high sure, but there was nothing even
close to what I wanted anyways. So I stayed put in my current flat, whose rent
hasn't gone up in the 3 years I've been renting it.

Chinese urban infrastructure would love to have US urban infrastructure
problems. Trains are wonderful, roads are great also if you want to cut down
on 10-day long traffic jams. But they are nowhere near the states in terms of
infrastructure, and much of it are white elephant projects that will never
contribute to the economy in any meaningful way.

~~~
narrator
I believe you that the construction probably isn't great, but how does it
compare to living out in rural areas, or wherever people moving to the cities
used to live? There are still a lot of Chinese who are not urbanized and all
this building should be a step up for them.

~~~
seanmcdirmid
Those apartments are being bought by speculators, not urbanizing farmers.
Those farmers can't really afford these apartments though, nor can they send
their kids to local schools even if they buy them (China hasn't reformed the
huko system yet). So they come to the cities as migrant workers, leaving their
families behind, living in cheap dormitory accommodations or even in basements
(lookup "ant tribe"). China will have to sort out this imbalance before
urbanization can drive much of the economy, and speculation doesn't really
help here (maybe they could eventually afford a $200k apartment, but $1
million? Really?)

------
ageofwant
Here in Sydney and Melbourne, 1/4 of all apartments are sold to Chinese, even
Chinese government owned corporations.

[http://www.abc.net.au/news/2015-10-12/selling-the-
australian...](http://www.abc.net.au/news/2015-10-12/selling-the-australian-
property-dream-to-china/6841810)

~~~
contingencies
To be fair, recent mainland Chinese immigration has enlivened a lot of
otherwise dead areas of Sydney, and I'd wager Melbourne. Places that were
ghostly failed malls are now thrumming 24 hour apartment-ringed nexus for food
and entertainment. (Eg. Chatswood.) A similar transformation has permanently
improved central Auckland. Smiles from China, where I now choose to live ... a
Sydney native.

~~~
shostack
Out of curiosity, where are all the jobs supporting the people now living
there?

Are they commuting to more urban areas?

~~~
ageofwant
Mostly investment properties as far as I can tell, renting to students,
singles, that kind of thing. So fairly mobile renters, they commute to where
they need to be.

------
Steko
Apparently it's 'money flooding out of country x' week at Bloomberg:

[https://news.ycombinator.com/item?id=10498040](https://news.ycombinator.com/item?id=10498040)

~~~
toomuchtodo
I believe that's what they call "economic contagion". Capital is trying to
find safe returns somewhere, anywhere.

------
lifeisstillgood
Where would you like your money - in a country with tight capital controls, an
unstable political hierarchy, unclear or unreliable economic data and lack of
"institutions" or ... China

:-)

------
colordrops
Of note is that the recent rise in price of Bitcoin is in a large part due to
this outflow of money from China. This article totally left that channel out.

------
Jerry2
Money's also flooding out of Canada:

>Money Flooding Out of Canada at Fastest Pace in Developed World

[http://www.bloomberg.com/news/articles/2015-11-02/money-
floo...](http://www.bloomberg.com/news/articles/2015-11-02/money-flooding-out-
of-canada-at-fastest-pace-in-developed-world)

~~~
beachstartup
might be related. a lot of money has flooded into canada because of the
chinese. see: real estate.

~~~
toomuchtodo
While at the same time, money is flowing out of Canada due to the collapse in
oil prices.

------
shostack
It seems like the media has been trying to _will_ a crash in global markets to
happen with the amount they've been going on about this.

How biased are their opinions and what do more neutral experts say about the
direction the global economy is heading? Honest question as I am not an
expert.

~~~
seanmcdirmid
They are reporting facts, really it is as simple as that. People are moving
money out of China (I'm one of them), confidence in the economy is not good
even if the government says everything is completely spiffy. Bloomberg doesn't
have to make anything up to talk about how people are moving money out of
China, they just need to follow the money. And if the money is flowing one
way, it is completely reasonable to speculate on "why" that is so, and I think
it is obvious (confidence is low, better investment opportunities exist abroad
then what can be done with the money at home).

~~~
shostack
Thanks for the clear and logical explanation. I find it hard to trust the news
in this day and age so always interested in other opinions on the biases of
the publisher itself.

~~~
jonesb6
I feel the same cynicism. But then I remember cynicism !== intelligence. I'm
trying to actively cut down on my news, while keeping a few channels open
(HN/geopolitics/basketball..), in order to become less of a cynic..

~~~
jazzyk
When it comes to protecting your money, cynicism is a good thing...

~~~
jonesb6
Generally I would agree, but what if your cynicism limits you from taking that
one high risk opportunity that could make a serious impact on your financial
future? I mean we're all start up junkies here (for the most part) would that
not be considered a high risk activity that would be avoided by any serious
cynic?

I would also make the argument that the majority of the population (myself
included) would not benefit from participating in economic activities
requiring cynicism. I think financial literacy for most people is a 'learn it
yourself' affair that most people choose not to do, and therefore they should
avoid the financial world like the plague.

Be as naive as you want in the cushy world of low risk, low yield,
investments. Happier lifestyle I'd wager.

~~~
seanmcdirmid
Are the tables rigged or not? Going in as an optimist into a scam will surely
be a bad thing.

Living in China, I've learned to appreciate fair financial systems. Many
investments I wouldn't have considered in the states before now look like
really good deals, simply because they are much more "fair" than what is
available to me in China.

China has no low risk/low yield investments beyond long term savings accounts
that don't even beat inflation. That is why so much money was rushing into the
stock market, and now again, real estate. Because literally there isn't
anything else (ok, maybe some undergound banking deals, but do you want to
deal with the mafia?).

------
mahyarm
That money exodus has been happening for a decade from Vancouver's
perspective. Maybe it's just accelerating now.

~~~
elchief
And our neighborhoods are emptying out...

------
gscott
Good thing China has all of those Treasury Bonds to sell.

