北京严控民间资金外流 地下钱庄收费翻倍
A large amount of private capital in China has fled abroad, leading to an increase in the commissions charged by underground banks. According to people familiar with the matter, recently, the commission for transferring RMB to US dollars abroad through underground banks has reached 7%, which has doubled year-on-year. Separately, the apps of two online brokerage firms were forced to be removed in China in an effort to crack down on capital outflows, sending shares in Futu Holdings and Tiger Securities tumbling in the U.S. on Tuesday.
It’s my supposition that fairly early on, the lockdowns went from being a public health response to an economic policy. If China were truly locked down for public health, then exports should suffer. There were some supply chain disruptions that rippled through the global economy, but China’s trade balance set new records as exports soared and imports tumbled. Occam’s razor told me they’re manipulating their trade balance.
Why manipulate the trade balance? Back in 2014, China was under intense economic pressure caused by the Federal Reserve tapering QE3. Two of the earliest signs were debt defaults among smaller companies along with credit guarantees that were cross held by many companies in local economies.
Rumored Mass Death of Companies in Xiaoshan District of Hangzhou If Banks Collect on Debts; Government Tells Banks to Sit Tight or Leave
Credit Guarantee Firms Go Down Like Dominoes
An extremely brief overview: China’s financial system needs dollars. Treasuries in the FX reserves largely represent claims by the financial system. China's reserves are rather limited and they can’t let reserves fall below about $3 trillion. (We don’t know the exact number, but it must be growing over time.) Eventually, outflows reach a point where China has two options. One, keep defending the yuan and risk a catastrophic depreciation or two, let the yuan depreciate earlier in a controlled move. The government chose the latter. China lets the yuan depreciate in August 2015, a “shock” to everyone who didn’t know that China was still running a dirty peg to the U.S. dollar with its forex reserves streaming overseas.
By around 2017 to 2018, China’s capital account is locked down and has been since then. Forex reserves also flatlined despite all the economic turmoil since then.
Meanwhile, notice the trade balance explodes in the past few years. The U.S. dollar bull market resume in the middle of 2021 and right around the same time, China’s trade surplus starts exploding higher. It also rose from 2014 to 2016 in the prior major bull move in the dollar, albeit back then the capital account was open. (If you’re wondering about the spread between SAFE and Customs numbers, see this tweet thread.)
I asked myself a question: if China if racking up an extra $300 to $400 billion per year in trade surplus and it’s not showing up in reserves, where’s it going or is it offsetting outflows? What’s the simplest explanation? Knowing that there’s outflow pressure (the fact that they closed the capital account and kept it closed tells us this, we can also surmise that the closed capital account has also built pent-up money waiting to leave) and knowing that prior USD bull runs reduced China’s reserves, and seeing similar signs of economic weakness as in prior periods, I settled on hidden outflows.
Now a story that the cost of evading China’s capital controls has doubled. Another way of looking at that is the value of USDCNY might be about 3.5 percent higher, or around 7.25.
If you’ve been reading here awhile, you know I watch USDKRW as a tripwire. Korea’s economy is joined at China’s hip:
Back to the story that led this post:
Tencent-backed Futu Holdings said on Tuesday its app would be removed from China's app store from May 19, while Tiger Brokers would also be removed from China's app store, amid Chinese authorities' increased focus on data security and capital outflows. Do the same from May 18th. Both companies said their existing customers in mainland China would not be affected by the app removal. However, the removal of the two apps will prevent a large number of potential retail investors in mainland China from easily trading securities in markets such as the United States and Hong Kong.
Finally:
Cai Shenkun, a senior financial commentator, told this station that Futu Holdings and Tiger Securities are operating illegally in the Chinese market, but in the past China had sufficient foreign exchange reserves, but the situation is quite different now: "Now the foreign exchange is facing a gradual reduction, and the magnitude is very large. , in such a situation, he will definitely cut off all the channels for foreign capital outflow. So this is just the beginning. I estimate that the funds remitted from China to overseas soon, including the amount of 50,000 US dollars per person per year will be fully controlled.”
The only caveat with the post is it comes from RFA, a biased source. However, it matches my expectation.
A final piece to add: the deposit rate cuts in China. I expect U.S. rates will tumble soon enough, but for now the spread in rates is a pull for Chinese money. When those rates finally tumble, the U.S. dollar should already be well into a bullish breakout versus the yuan, won and yen amid global deflationary pressure.
I have an index roughly 50 percent yuan, 30 percent yen and 20 percent won, something like the ADXY. The axis is inverted, showing the U.S. dollar direction. It’s a clean base with a successful test of support.
I don’t think it’s a question of if the yuan will hit a new low, but when. I still believe the currency will trade much lower in the future, but I expected that years ago. It all depends on if there is a crisis and a U.S. dollar rally that coincides with major domestic weakness in China. If everything doesn’t line up, they can escape again as they did in 2016 and 2020, but I hasten to add both those times involved global coordinated easing by central banks. If inflation ties the central bankers’ hands, that is when I will be on highest alert for a major currency crisis emanating from East Asia.
In the immediate present, conditions are green for a major bearish move in the big three East Asian currencies.
Can Chinese get money out via bitcoin? Great informative post