Courtesy of Mish.
A reader pinged me the other day about China “dumping” US treasuries.
I responded, “dumping” does not properly describe what’s happening. China did not sell US treasuries because it wants to get rid of them. Rather, China’s reserves plunged because of capital flight. China is doing all it can to stop capital flight and shore up the value of the yuan.
China has tightened capital controls a couple of times, but so far, it hasn’t worked.
China’s Foreign Reserves Drop Most in 10 Months
Bloomberg reports China’s Foreign Reserves Drop Most in 10 Months as Yuan Slumps.
Key Points
- Reserves decreased $69.1 billion to $3.05 trillion in November, the People’s Bank of China said in a statement Wednesday
- That compares with the median forecast of $3.06 trillion in a Bloomberg survey of economists
- Decline was biggest since reserves tumbled $99.5 billion in January
Big Picture
The fifth-straight monthly decline brings the reduction in the stockpile to almost $1 trillion from a record $4 trillion in June 2014. While authorities have begun tightening capital controls, a $50,000 limit that Chinese citizens are allowed to convert from yuan annually will reset at the start of the new year, potentially adding depreciation pressure on the currency.
“A combination of yuan weakness and a peak in the mainland property sector is conspiring to increase capital outflows,” Bloomberg Intelligence economists Tom Orlik and Fielding Chen wrote in a report. “Another month of falling reserves does little to inspire confidence, especially as households await the renewal of their FX quota at the start of 2017. Even so, with the yuan steady so far in December and capital controls in place, there’s reason to hope China’s reserve buffer will end the year on a more stable note.”
“The announcement of additional capital controls will smooth the fall in reserves for some time but won’t solve the problem,” said Alicia Garcia Herrero, chief Asia-Pacific economist at Natixis SA in Hong Kong. “China isn’t out of the woods.”
“I smell more capital controls, which run against any hopes of reform or internationalization of the yuan or a sharp drop in the yuan,” said Michael Every, head of financial markets research at Rabobank NA in Hong Kong. “And all these fun and games come before we have even seen President Trump.”
Capital Controls on Insurance
One of the ways corporations have been getting money out of China has been via insurance schemes.
In response China Clamps Down on Insurance Companies’ Buying Spree
Chinese regulators have intensified their crackdown on insurers’ use of high-risk, high-return products, which are often used to fund corporate deals.
The clampdown comes days after the country’s securities regulator separately denounced companies making highly leveraged takeovers as “barbarians” and “robbers”.
The China Insurance Regulatory Commission on Tuesday said it had barred Foresea Life Insurance from issuing “universal insurance” products.
Regulators have become increasingly wary as Chinese insurers have made a series of highly leveraged acquisitions in recent years. Such concerns were believed to be part of the reason Anbang Insurance withdrew its $14bn bid for Starwood Hotels & Resorts.
“If you use funds from questionable sources to undertake highly leveraged buyouts, and turn from an [industry] stranger to a barbarian, and finally become a robber, this is not acceptable,” said Liu Shiyu, head of the China Securities Regulatory Commission, in a weekend broadside.
Earlier this year, the chair of the CIRC warned against insurers, awash with cash from universal insurance premiums, becoming “automatic teller machines” for takeovers.
Buying Sprees About to Hit Brick Wall
The Financial Times reports on the Buying Spree Behind Beijing’s Investment Curbs.
