More Bad News Out of China, Including Capital Flight

Reader Michael sent a host of updates on China, which might collectively be called, “Lousy China News Wrap.” And I don’t think he was cherry picking

The eye-catching one was a coded story on capital flight from China, “China warns of risks from “abnormal” cross-border capital flow,” from Xinhua. The reason that capital is exiting China now is that a lot of hot money came into China in 2008 to take advantage of a widely expected RMB apprecation (yours truly also thought the RMB was a one-way trade, but somehow managed not to act on it). Brad Setser and Michael Pettis have both watched the influx of speculative funds with considerable alarm, but the issue has not gotten traction in the media.

Pettis and Logan Wright wrote a Financial Times comment in July that gave a good overview:

During the first halves of 2005 and 2006, the trade surplus, FDI and estimated interest on China’s reserves accounted for 80-90 per cent of the country’s reserve accumulation. In the first half of 2007, these components accounted for about 70 per cent. This year, however, their share has declined dramatically to 39 per cent from January to May….Because there are likely to be speculative inflows buried in the trade and FDI accounts, their true share is probably even lower.

So what is powering China’s accelerating reserve accumulation? Probably hot money….more and more investors, business people and ordinary households are bringing money into China to take advantage of profits associated with the expected appreciation or to protect themselves from the losses they will incur with the rising renminbi…

There is no technical definition of hot money ….but it is possible to obtain rough proxies…In every case the proxy…shows a startling increase over the past 12 months. The fact that in recent months the authorities have taken increasingly desperate measures to staunch the inflows confirms this interpretation of soaring hot money proxies….

Hot money is notoriously unstable and even more notoriously procyclical. When the economy is growing, or even overheating, inflows are likely to increase net investment and add even more fuel to the economic engine. But when conditions change and the economy begins to slow or the country face financial risks, hot money is likely to flee the country, exacerbating the very conditions it is fleeing.

With this background, the importance of Xinhua story is more apparent:

China faces a threat of “abnormal” cross-border capital flow because of global financial tumult, the country’s foreign exchange regulator said Tuesday…

More money flowing out of the border could increase the risk of liquidity strain in the country, which is especially dangerous amid the global financial crisis…

China’s foreign exchange reserves had fallen for the first time since December 2003, Cai Qiusheng, a SAFE official, told a conference last month. He didn’t give specific data of when that happened or by how much.

He said the current reserves were below 1.9 trillion U.S. dollars, the level recorded at the end of September. It was the largest reserve in the world.

The SAFE will improve management on fund flows in and out of the border and more closely monitor the balance of payments, said Hu.

He urged for better risk control in managing foreign exchange reserves, which was “the last safeguard” against risks.

China’s central bank said Tuesday it will also strengthen scrutiny of cross-border capital flows and study ways to tackle “abnormal changes” in the balance of payments.

The People’s Bank of China said it will check the validity of trade payments and step up supervision on individuals carrying foreign currencies in and out of the country.

I would assume “strengthen scrutiny of cross border capital flows” means “tighten foreign exchange controls even further.”

And separate from the flight of hot money, we may be seeing a reversal of FDI investment as newly needy multinationals unload their stakes in Chinese companies to shore up their balance sheets, as Bank of America has. From Reuters:

Top U.S. lender Bank of America raising cash to weather a dismal market at home, is selling a $2.83 billion chunk of its holding in China Construction Bank (0939.HK: Quote, Profile, Research, Stock Buzz) at a 12 percent discount on Wednesday, according to a term sheet obtained by Reuters.

The U.S. lender was selling more than 5.62 billion shares, or nearly 13 percent of its holding in Construction Bank, at HK$3.92 apiece, in a placement that had been widely anticipated.

The stake represents about 2.5 percent of Construction Bank, and will leave Bank of America with a 16.6 percent holding in the Beijing-controlled lender once the sale is completed.

“The news has been expected but investors will still take it hard because BoA will most definitely sell more. They need the money,” said Francis Lun, general manager with Fulbright Securities in Hong Kong.

ChinaStakes gives an update on the Chinese housing market that makes the US seem almost balmy. Note that in China, consumers mortgages are not common and even when they are used, loan to value ratios are very low, so a fall in real estate prices does not lead to the sort of large scale foreclosures that we see here. However, Chinese banks are very exposed to developers, and the article discusses how a very high percentage of new development is unsold (enough to constitute a three year overhang in Beijing, for instance). China’s central bank last fall forecast a 10% to 30% fall in real estate over the next two years (and recall this is an even bigger decline in real terms, since China still has a high inflation rate) and warned of resulting liquidity problems for real estate companies and banks.

From ChinaStakes:

For those who have worked in the Beijing real estate industry over the past 10 years, 2008 has been the worst. Latest figures revealed by the Beijing Bureau of Statistics show that housing sales area between January and November totaled 7.389 million square meters, a drop of 52.4% over the same period of 2007.

A 50+% decrease in sales leaves much new housing vacant. By the end of December, 2008, the number of salable houses and apartments under construction in Beijing reached 188,031, while finished but unsold houses and apartments totaled 174,290, leaving over 360,000 units on the market. If they are sold at 120,000 a year, the rate in 2007, it will take at least 3 years to sell them all, and that’s if no more are built….

The drop in new housing prices has also directly affected the prices of used housing. According to 21st-Century Real Estate, prices for 85% of the second-owner housing on the market saw an average price fall of 8.9% in the second half of 2008…

2009 will be a year of adjustment for the real estate industry….Any boom in a real sense, with rising housing prices, won’t come until 2011 at the soonest

Savills, one of the world’s largest property service firms, reckons the 2008 vacancy ratio of A-level commercial property in Shanghai’s Pudong district may be as high as 25.6%.

And then there is the residential market. In 2008 in Shanghai, new housing turnover slumped by 57%, year on year. In Nanjing and Hangzhou, the other two big cities in the Yangtze River Delta, trading volume slumped by 54.3% and about 50%, respectively. Prices in these three cities have not been cut, but industry insiders believe it is just a matter of time before developers will have to do so to promote sales, perhaps by as much as 15% to 20% in 2009

And the last sighting, from People’s Daily, “69.6% of Beijing residents affected by financial crisis“:

69.6% of the respondents said they were “directly affected” by the financial crisis, according to a specialized survey of over 2,000 respondents in 18 districts and counties in Beijing released by the Beijing Social Facts and Public Opinion Survey Center.

Those who believed that they were “severely” affected account for 15.7% of respondents. Of which, the percentage of respondents who chose this option was highest in the 41 to 50-year-old age group, reaching 22.2%.

Moreover, the survey shows that those who were least affected by the financial crisis were teachers, and those who were affected the most were “self-employed/freelance workers.”…

Among households with incomes less than 10,000 yuan per month, the lower the income of the household the greater the impact they felt from the financial crisis.

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  1. ndk

    The decline in Chinese forex reserves leads to an interesting little chain of events.

    Apparently right now China is defending against a fall in the yuan, instead of a rise in the yuan, as their reserves are falling. To do so, they might sell some of their treasuries, or more likely agencies, into the open market for dollars. Then, they would sell the dollars to repurchase some yuan. The yuan are then essentially retired, resulting in a contraction in the monetary base. A further rise in U.S. real interest rates could result.

    Remember that China performed a lot of sterilization by hiking reserve requirements and loan quotas, in addition to issuing sterilization bonds. The reserve requirements are still relatively high, and some loosening has occurred to increase domestic money flow, but this is the mechanism by which capital flight could be the source of a lot of liquidity strain. I’d expect to see reserve requirements loosened considerably in response. There are other reasons to be concerned about Chinese banks, including those Yves mentioned, and this should be a further reason.

    Now, China’s still running a large and growing current account surplus, but it’s possible to imagine a world in which this surplus ceases to grow. For example, if the price of raw materials begins to surge again in response to worldwide devaluation of fiat currencies and government spending, while overcapacity and weak market demand for end products limit demand, margins, and profitability, it’s not a good mix. It’s easier to mothball upstream too, as Alcoa demonstrated tonight. That’s dissociated from the hot money’s impact, but still worth keeping in mind.

    I wonder whether any Chinese private entities entered into deals protecting themselves against a further fall in the yuan, like Korean firms did for the won.

    I’m very fond of China, but this is looking like a pretty rough patch.

  2. bg


    I remember you offered to take the other side of a bet with me on US savings rate. I posit that there is a close correlation to China’s account surplus, which is (on my side of the bet) worse than expected due to the change in US savings.

    I spent a few years in that part of the world, and I love it too. I think the great depression II will be worse that I, however with China taking the brunt of it. (I think UK GDP fell 5% in GD1, which looks like we could surpass. US GDP fell 30%, which china us unlikely to surpass, but the world is more interlinked today).

  3. tyaresun

    Crises news will move from US and Europe to Asia in 20009. It will be doubly hard because of the lack of safety nets. All I can hope for is that bloodshed should be minimized at all cost.

  4. ndk

    I should also add that if the dollar strengthens due to this rise in real interest rates — which wouldn’t surprise me, until that Wile E. Coyote moment strikes — Chinese exports to Europe and other parts of the world become somewhat less competitive, further decreasing China’s surplus. Setser has pointed out that the strong Euro caused Europe to pick up the consumer of last resort role from America for a little while.

    Chinn estimated this at around 1%, but I guessed it might be higher. It’s hard to say definitively, but I really think events have shown it was higher.

    Just another one of those positive feedbacks working in the wrong direction…

  5. ndk

    “This” being the amount long real interest rates were depressed by petrodollar recycling and Asian export vendor financing, sorry.

  6. bg


    so you are making another case for long interest rates to rise 1%+ as petrodolloar and asian export hot dollars mean revert?

    I am not fully following.

  7. ndk

    so you are making another case for long interest rates to rise 1%+ as petrodolloar and asian export hot dollars mean revert?

    I am not fully following.

    That was the case I made back in February ’08, yes, though I wouldn’t consider either of those categories particularly hot dollars. Tepid, perhaps.

    Follow the link to Econbrowser and read the first comment. It’s still very reflective of my current thinking(minus the typo with velocity increasing), though the Fed’s most aggressive actions have had significant impacts in the last couple months.

    I’m much less confident about my bet with you, because of the Gini distribution in the U.S., but I’d honor it.

  8. bg

    our “bet” has made me think more on the subject too, and I also started to parse the income distribution for indicators.

    We know that luxury goods are down 40%. Common sense would say the truly rich have no restraints on daily consumption. Common sense also says the poor have no where to cut. For savings to shift 10%, then half the population probably has to save 20% more. That seems like a tall order, but given the car salesmen buying McMansions, and now having to liquidate, there is probably a segment cutting spending by half. To your point, the analysis is hard, but I’d still honor my bet too.

    Meanwhile the antimatter is forming in the parallel universe on the other side of the globe, where they are suddenly forced to save less.

  9. Anonymous

    “Apparently right now China is defending against a fall in the yuan, instead of a rise in the yuan, as their reserves are falling. To do so, they might sell some of their treasuries, or more likely agencies, into the open market for dollars. Then, they would sell the dollars to repurchase some yuan. The yuan are then essentially retired, resulting in a contraction in the monetary base. A further rise in U.S. real interest rates could result.”

    It China exiting US treasuries for yuan would tend to depress the USD and increase US interest rates, but critical question is whether the Fed responds by printing dollars to buy Treasuries (tending to keep interest rates low, but depressing the USD), or by contracting money supply (tending to protect the USD, but increase interest rates).

    As well as whether other investors in US treasuries shift their investments to other USD demoninated investments (tending not to impact the USD and potentially lower US interest rates) or to non-USD denominated investments (tending to depress the USD and potentially increase US interest rates).

  10. ndk

    It China exiting US treasuries for yuan would tend to depress the USD and increase US interest rates, but critical question is whether the Fed responds by printing dollars to buy Treasuries (tending to keep interest rates low, but depressing the USD), or by contracting money supply (tending to protect the USD, but increase interest rates).

    I disagree, 4:08: I actually imagine it would strengthen the USD. When China sells their Treasuries for dollars, someone else has just by definition bought a Treasury with their own dollars. Even if there were more dollars in circulation, because e.g. the Fed bought the bonds(this trade is basically happening with Agencies right now) I don’t think that would have much impact on the dollar’s valuation. We’re up to ~$800 billion in excess reserves and counting. What’s another $100b?

    The effects of quantitative easing and extra dollars on the exchange rate are apparently very small, while the effects of an increased real interest rate have been quite strong.

    It’s counterintuitive, but I think it’s right.

  11. wintermute

    Balance sheet repair is still driving capital flows from emerging markets. UBS has its end-of-year Dec 31st and managed to sell its 5% stake in Bank of China for nearly $900m in the closing days of Dec 08. This was after the 3 year lock-up period ended. Credit Suisse and BofA are closing similar deals.

  12. Anonymous

    As ndk points out any rise in commodity prices and we are in a completely different ball game where China will quickly pull out from financing US debt as trade deficits disappear. Most will argue that in a deflationary situation commodity prices are not likely to rise. There is a subtle difference though in whether commodity prices rise in the US or China and this relates to currency strength. Oil prices have slowly risen from their lows and inventory contractions will be slowing significantly.

    China has a safety valve option though in that it can let its currency value slide and export unemployment to the US. I am not sure that China can prevent currency devaluation, certainly Russia seems to have failed although circumstances are somewhat different. This is probably the least attractive option to the US or China, but the situation in China may force the issue. Trade credit is most noticeably constrained and problematic in Asia and China and to me this hints of banking problems. That real estate expansion in China fuelled by large inflows of money from abroad has stalled and I get the feeling that there is some sort of liquidity problem as a result.

    The US does have a counter action which would be to print dollars, but because the dollar is the reserve currency this may not act to reduce the dollar value as one would hope. The US and China now look to be in a bit of a deadly embrace. Europe, India and Brazil as well as being much more exposed to emerging markets may well have a better safety net of trade routes than the US, so there may be very good reasons why free trade agreements are proliferating as trading blocks try to boost their trading diversities.

  13. donebenson

    Another excellent discussion. Thanks NDK and BG.

    I would only make the point relative to NDK's mentioning that a rise in commodity prices would put pressure on China [and then the US]. If the world economy is going to be quite weak for awhile [following Reinhardt & Rogoff] then it is unlikely commodity prices will rise very much, unless hard assets become in favor due to a general flight from currencies. If that were to occur, then our problems will be bigger than worrying about Chinese margins or US interest rates.

  14. Anonymous

    Russia hasn’t failed to prevent its currency from sliding; its intervention has kept the ruble well above where it would otherwise be — at a rather large cost to itself. in real terms the ruble hasn’t weakened by much.

    China can easily absorb a capital outflow out of its ongoing $400b current account surplus (which seems to be rising as imports fall, esp. commodity imports)/ $2 trillion plus in reserves. China can offset the impact on domestic liquidity — as NDK notes — by relaxing reserve requirements/ generally undoing some sterilization measures. that may not get the liquidity where it needs to go, but it will avoid a monetary contraction. If china can add — counting its hidden reserves — $600 or $700b to its reserves to avoid appreciation, it can certainly spend some of that to avoid depreciation. With $2.2 trillion in reserves (counting the $ held by the state banks as part of their required reserves) china could literally finance a $1 trillion outflow and sitll have $1.5 trillion left (remember, it has $400b coming in from the surplus so the amount that needs to be financed by reserves is “only” $600b) the question isn’t capacity, it is whether China wants to resist a weaker RMB.

    Note though that the small downward move in early december may have led to larger than expected outflows, so one risk of a smallish depreciation is that it creates expectations for more — and, well, that tends to create a difficult dynamic to overcome.

    Three other point: the noise out of China suggests a fall in reserves, and even if reserves don’t fall, they aren’t likely to rise by as much as china’s trade surplus, so there almost certainly has been hot money outflows. But the data on reserves is often misinterpreted by those who haven’t thought about valuation effects. OCt and nov could be down largely b/c of the rise in the $, which reduced the $ value of China’s reserves. December will be the key tell.

    2/ China sure hasn’t stopped buying treasuries yet. right now they aren’t buying anything other than treasuries. the frbny accounts are consistent with modest, but still positive, reserve growth (or a shift away from private banks)

    3/ the “hot money” has to do into something. if it goes into dollars it is still a dollar supportive flow. Rather than having a $400b surplus that goes to the pboc and is invested in treasuries and agencies, china might have a $400b surplus that goes into offshore $ bank accounts and the like. It might produce more of a fall in flows to say the austalian $ (a diversification play for reserves) than to the US dollar.


  15. Anonymous

    The outflow of capital from China represents a demand for dollars instead of RMB investments. PBOC is selling the dollars required to satisfy that demand. It’s selling treasuries to source the dollars. And it’s reversing the central bank liability management that was originally required to position the reserves.

    If you believe in the interest rate effect of the “global savings glut”, then unwinding reserves puts marginal upward pressure on real rates. But this effect gets buried under more powerful deflationary forces that are driving treasury rates in the other direction.

  16. Waldo

    The US dollar is still the strongest currency?

    This is hard to see but in an inversed manner is discernible.

    What I mean is that how do you explain the Euro = $1.47 dollars back in July? How do you explain the dollars decline congruent with the behavior of our foreign policy and oil pricing power.

    Dollar weakness is a false negative. China knows this. China is making a bet that the dollar will strengthen and free market reality will return (in terms of dollar value).

    Watch in the coming years under Obama. Dollar will strengthen because of the unwinding of the murderous Iraq war and because of the oil market becoming competitive again. Low interest rates will dampen this reflex.

    Dollar is signalling our unjust behavior in regards to this f++king Administration.

    Europe’s decision about Iraq and its stance on manipulated oil pricing is evidenced in the Euro’s global value. The price differential is the direct value of virtue. Free markets cannot function with out it. Small amounts of vice are manageable.

    This is historic in terms of human history and I am amazed how we rationalize it to be our reality and wish for tomorrow!

    The RMB is essentially pegged to the dollar. This makes it a derivative instrument subordinate to the dollar (Mini-Me). The RMB is the dollar (America want to be) until it floats. America is the benchmark (China can see through the shit and still value the people and its economy).

    If America prosecutes this Administration, China will of looked very smart about its benchmark (Best we make China look smart.) and a confidence will spark globally. This would be the real stimulus we are looking for. When we find the national character to defend ourselves the natural system of free markets will return. Until then we are living in the darkness of humankind (vice). When the Dollar eclipses the Euro in value and/or the UK assimilates with the Euro we will see the sun rise again.

    Below is a poem I penned during these past eight years. I think it sums up our ignorance to the value of virtue in a free market.


    Darkness; light’s privation.
    Nothing has been done.
    Light’s not here for creation,
    Life has yet begun.

    Light came in an instant,
    An explosion of heat.
    The creation of infant
    To repeat, repeat, repeat.

    Today a sunrise to see,
    Dawn, the day’s new beginning.
    A new day to be
    Thinking and actions reeling.

    Darkness again is felt
    This time in the mind.
    Virtue’s privation; evil dealt
    Murder to humankind.

    A darkness seen at daylight
    Clothed in wicked vice.
    Greedy men cunning to fight
    And steal; profits taken twice.

    Darkness brought by thieving
    Not intended to last.
    Virtue conquers evil sceaming,
    Learned to fight by its past.

    We live in dark times
    Even as the sun enlightens.
    Our actions today defines
    If our children’s future brightens.

    So when you see her face
    Understand this happens
    By virtue – God’s Grace,
    Virtue Conquers, vice saddens.

    Darkness at night brings clarity
    Darkness at day brings strife.
    Follow God’s lead for humanity
    Love virtue and beautiful wife.

  17. ndk

    (remember, it has $400b coming in from the surplus so the amount that needs to be financed by reserves is “only” $600b) the question isn’t capacity, it is whether China wants to resist a weaker RMB.

    You’re certainly right at present, bsetser, but I wonder whether the surplus will continue to grow or even maintain that size, with the collapse in exports, trade, and pricing power that is occurring.

    We would also do well to remember Benjamin Franklin’s old dictum: “a bond not purchased is a bond sold.” Or something like that. It’s the marginal change in demand for U.S. debt that interests me and my unhealthy obsession on real interest rates, so from my perspective, the difference here is smaller than one might think.

    The question you pose is definitely one of the most salient in our collective predicament, especially now that domestic Chinese inflation is going down rather fast. I’m afraid of the answer, though.

  18. S

    Japan per Bloomberg sights a reprort that Japan looking at waving cap gains for foreigners investing in the country. The race to the bottom is on…

  19. S


    A feel of something to come per your concerns…There is also the story in the FT that china is seeking to buy mines (front section yesterday). the HCinese will not move aggressivily to trample themselves on reserve valuation. If they were smart they would try and deploy into assets and afyter sufficiently diversified then have the conversation about the new paradigm, whatever form it takes. What if commodities at some point became decouple from the dollar – ie. the dollar rises and commodities rise sustainably? admitdely haven;t looked at the chart but thinking if the CRB is overlayed against the dolar it has been an almost -1 correlation. I agree with NDK – relative arguments are relative only so long as there are no alternatives.

    Investors shun German bond auction
    By David Oakley (FT)

    Published: January 7 2009 13:30 | Last updated: January 7 2009 14:56

    Investors shunned one of the most liquid and safest assets in the world on Wednesday as a German bond auction failed in a warning for governments seeking to raise record amounts of debt to stimulate their slowing economies.

    It is the first eurozone bond auction of the year and an ominous sign of potential trouble ahead for governments around the world, with an estimated $3,000bn expected to be issued in sovereign debt this year – three times more than in 2008.

    The auction of 10-year bonds failed to attract enough bids to reach the €6bn the government wanted to raise. Although a number of German bond auctions failed last year, it was almost unheard of before the credit crisis.

    Meyrick Chapman, a fixed-income strategist at UBS, said: “When a German bond auction fails, then that does suggest there is trouble ahead for governments wanting to raise money in the debt markets.

    “There was certainly a supply/demand imbalance because of the large amount of issuance in the last quarter of 2008 and the large amount due in the coming months. Before the financial crisis, German bond auctions just did not fail.”

    Although government bond yields are trading at historically low levels, because of fears of deflation and investor demand for safe government paper in an uncertain climate, the failed German auction is a sign that appetite for these bonds is starting to diminish.

    A number of countries, including the UK, Italy, Spain, Austria, Belgium and the Netherlands, have either struggled to sell bonds or been forced to cancel debt offerings because of a lack of demand.

    The UK successfully sold £2bn in gilts due to mature in 2038 on Wednesday.

    However, Robert Stheeman, chief executive of the UK Debt Management Office, warned last month that the ÜK government could also struggle to sell bonds because of the vast amount of bond issuance in the pipeline.

    The UK is planning to raise £146bn in bonds this financial year – three times more than last year.”

  20. Anonymous

    The Chinese government is in a lot more trouble than they let on.

    The central government is going to go heavily into deficit to finance the “stimulus”, which comes nowhere near to replacing the lost export demand.

    At the rate the forex reserves are declining, they have about 6 months before it comes to crisis proportions.

    The real problem is that the fall in imports is a “one time” drop mostly associated with declines in imports of machinery, stockpiles of commodities, etc. needed to keep the export engine going.

    Import demand is going to stabilize, then rise again as China need to import a lot of commodities to keep themselves going: energy (coal and oil), iron ore, etc.

    As this happens while exports remain stagnant, it is conceivable for China to go sharply into trade deficits, and with it, the forex reserves can be drained in a hurry.


  21. S

    This would sound like the US strategy in a but shell. The US is desperate to prusue a strategy of simply outlasting everyone and being cold shivering and naked but alive. If the fiat regime blew apart first, then what?

  22. Anonymous

    I just can’t take any “china is doom” theory seriously.

    1. From China’s economic structure (low integration, mostly intensive labor low skill/recent urbanites), they won’t experience structural collapse of highly integrated industry. Those type of industry are firmly under government control. Mostly state companies. (Oil, steel, heavy manufacturing, etc) The workers can simply riot for a few weeks then go home to the village. Nobody has 30 years mortgage to pay.

    2.What about the middle class? Well, in developing country, one save for rainy day since there is no social safety net. Specially with pervasive underumployment. Ontop of that, most have the basic covered (house, transportation, etc) Again, everybody is thinking suburban-McMansion situation in the US. complete bull.

    So my conclusion with China, they have passed the “freak out” period. The wave of uncertainty has passed (who is going bankrupt, who can’t pay debt, etc) The dust has settled, due to much simpler economy. Now they are figuring out what to do. (what business opportunity to do next)

    What about the hot money in and out? meh…

    It’s government trick to lower Yuan using rumor instead of direct intervention. The basic question remain: China is growing: where will all those hot money go? The US? China is the most stable place to be right now.

    My prediction: the real economic game will soon begin. The global dust has settled. Now everybody will makes their move. Eg. observe Russia, they are back in business. Hold currency high to pay back debt, competitive devaluation, and watch export booming, surplus, … ultimately growth…

    China is using the same strategy, except they are pegging their yuan, so they need another trick to play the currency.

    I for one really believe, it’s time to shoot all those yapping economist. They don’t have a clue. They are more like mechanical engineers trying to tell a race car driver how to win a race in the middle of a track run. They know the mechanics, but doesn’t know anything about human side of race driving.

    It’s bump and bruise time. This is market economy afterall. (but then again, we have Bush in charge. so we’re screwed)

  23. Anonymous

    Sounds like China and Russia are going back to what they do best, namely 15th century style peasantry, while we are going back to running the world… forever. Hmmm… why would it be any other way?…

    And, I bet in less than 12 months, your friendly neighborhood Walmart will (once again) be sporting top quality “Made in the U.S.A.” product lines (as opposed to their current cheap Chinese-made plastic garbage).

    Vinny Goldberg has left the site.

  24. Waldo

    “And, I bet in less than 12 months, your friendly neighborhood Walmart will (once again) be sporting top quality “Made in the U.S.A.” product lines (as opposed to their current cheap Chinese-made plastic garbage).”

    Oh foolish Vinny.

    Enjoy your Nike shoes and bed sheets.

  25. Born Again Democrat

    So this all boils down to factors impacting China’s balance of trade, ie, China trying to maintain employment in her export sector?

    Is there a chance of beggar-thy-neighbor monitary policies among the Far Eastern export-led economies? Would it spread to the West?

    Sounds like the Great Depression to my amateur ears.

  26. Printfaster

    I am seeing the capital flow out of China a bit differently. It is not lack of faith in the Chinese economy, it is that China is the only source of liquidity for liquidity starved foreign banks. Both the BA and Swiss bank withdrawals were because the parent bank was cash short.

    That is the irony of all this: The dollar is strong because of the need for liquidity, and the renminbi is weak because it is the only source of liquidity.

    Sounds like we are approaching a Minsky moment.

  27. mxq

    Printfaster…good point about source of liquidity.

    I guess after the 40-50% drubbing of the world equity indices, the most liquid forms of capital are used up…BAC’s 12% haircut is way better than the 60% buzzsaw required in the abs and credit markets.

    Part of me sees this as a gigantic redemption on the Chinese Private equity play…similar to what we saw with hedgies in 2H08.

    either way, details about their forex flows are going to be critical.

  28. Anonymous

    There was a lot of funds that were quietly invested in China by overvaluing exports and kicking back the excess to the overseas buyer in RMB within China.

    These investments are now being liquidated where possible, often using the reverse trick (undervaluing exports) to bring the funds out.

  29. Printfaster

    A bit more on my Minsky moment.

    It is precisely because there is no long term faith in the dollar that the dollar is being priced upward, and conversely, it it the long term faith in the renminbi that its price is being driven downward.

    The dollar upward because everyone wants to get out of dollar denominated debt (selling debt to buy dollars). The renminbi downward because of a push to get into renminbi debt.

    Kind of like watching a cigarette rolling into a gasoline spill.

  30. Anonymous


    You got me — I haven’t been a very loyal Nike customer. I always buy my shoes “direct,” (meaning from my native village in Eastern Europe, where I negotiate the price, pay in gold, and completely cut out the Western middleman). Sometimes I even get freebies like fresh goat milk, or a bottle of homemade vodka.

    Vinny Goldberg has left the farm.

  31. bg

    Anon 2:32PM

    “I just can’t take any “china is doom” theory seriously.”

    I read your argument carefully trying to find the dissident with the best arguments. The problem I had with your analysis is that everything you said about China’s strengths were true in 1968 and and 1989. What has been different this time was how they used easy credit and globalization to their benefit over the last 10 years, and what the lord giveth seems to have begun to be taken back.

  32. pk

    Russia’s back in business eh?

    I’ll be a very interested observer on the social unrest that develops in china during their economic down turn. The mass exodus to the cities will be on the back burner as people return to the country side to be with relatives as a form of a social safety net in bad times.

  33. Anonymous

    bg said… January 7, 2009 8:02 PM

    “The problem I had with your analysis is that everything you said about China’s strengths were true in 1968 and and 1989. What has been different this time was how they used easy credit and globalization to their benefit over the last 10 years, and what the lord giveth seems to have begun to be taken back.”


    few business probably are in over their head.

    But if you look at overall picture, to the chinese bad economy means “starving and several million people dies” and this happens only 50 yrs ago. everybody still remember. Getting laid off from factory and have to go home to the village isn’t a big calamity. There isn’t going to be economic shock, maybe severe consumer slowdown and unemployment inching up for few months.

    The big credit implosion? Where is it? (One or two steel factories went bankrupt, promptly bailed out. Maybe the real estate sector is in the dump, and export oriented low cost manufacturing on non essential items like toys are dead.)

    so, I still can’t see it. The chineses are not in big debt and they are infinitely liquid. They maybe at lost with their over capacity, but they are not experiencing economic collapse. It’s not systemic breakdown like what we have here. (total banking crash, credit flow halting, etc)

    From chinese historical perspective, current economic problem is not even in their top 5 worst in the past 50 years.

    I for one think the danger for domestic ecnomy would be a sharp V asian recovery where we are going to experience capital flight. In order to fight that, Fed has to raise interest when nobody can afford it.

    Just watch. 6-10 months from now, after competitive currency devaluation ends, we are going to enter the interest rate battle.

  34. Anonymous

    “pk said…
    Russia’s back in business eh?”

    I was serious, look at their budget. Look at their trade surplus and export trajectory.

    They are having a ball. Maybe they won’t be buying too much export goods, but they are cranking it up. High tech weapons particularly.

    The reason is simple: all their customers are liquid and flush with cash (China, India, middle east, asian)

  35. pk

    Russia does still have 3/4’s of their reserves but Putin seems intent on not overseeing a massive devaluation of the rouble like his predecessor and has burned through 1/4 of their reserves quickly. Their economy isn’t diversified, all their eggs are in one basket and they have absolutely zero control over the basket and its fate.

    What good is it that their customers are flush with cash if what they sell to them has declined 70%? You don’t have pricing power after the collapse of a bubble.

    Lastly, after their incursion into Georgia their market got slammed and a large swath of foreign investors left Russia. Are these investors going to step back in with the sharp and unstable devaluing of the rouble?

    With regards to China, my point about social unrest (and I do think it is a bigger problem than most people realize) is simply that China will have to make a choice. We’ve consumed too much, they’ve produced too much. Things have to balance out. If China chooses to sustain the economic growth they’ve become accustomed by tapping into their coffers they may find that it is just as hard to defy the laws of supply and demand over there as it is in America…

  36. mxq

    i don’t care how liquid or flush with cash any country is, if there is a mass redemption of fdi…they’re in trouble.

    FT just reported:

    “Royal Bank of Scotland, the cash-strapped UK lender, is considering selling its £2bn stake in Bank of China amid a scramble by foreign investors in mainland banks to cash in their lucrative holdings.”

  37. Printfaster

    China is not in trouble if it faces large liquidity redemptions. The US is: China holds a trillion or more in treasury debt, which is the next domino.

    This would be your Minsky moment. The liquidity oscillations will then become unstable and worldwide hyperinflation becomes the liquid. When I think of destructive oscillations, this comes to mind:

  38. Richard Kline

    So anon of 2:32 and 10:49, I am with you. This contraction in China is ‘serious’ but not severe by any historical standard _for China_. Dire mooglings about potential social collapse in China are quite laughable. What has been left out of this discussion, though it was raised in come others here in comments at NC over the last few days, is that to the extent to which government stimulus gets traction to work boosting demand, China is well-positioned for this, with substantial savings, strong forex reserves, real infrastructure needs which can soak up low-skill labor—exactly where the demand fall is likely to occur—and so on. China is loosing export income, but also experiencing import price drops: they are far from screwed. I think there is a real possibility of a V rebound in East Asia and specifically in China.

    The big ‘losses’ in China are likely to be in property speculation—just where it would appear that the bulk of the hot money inflows went. As long as this doesn’t take down a large chunk of China’s banks, and that does not appear to be in the cards, its a big ‘meh’ for the government and the bulk of the population which was never in the loop big time.

    And anon of 6:35, it would be interesting to have some confirmation of the ‘surplus flow parking’ argument which you make. That would in some respects account for _how_ some of the hot money got onshore in China which has been the real mystery of the last year.

    By mid-09 we will have real signs of how competitive currency and competitive interest rate strategies are going to align. I would hope to see a measure of global cooperation on this, because hostile actions will really whipsaw currencies. The key, again, is how the US cooperates in aligning itself since everyone pegs to the $ and US import demand has been the driver. Thoughtless, reckless US fiscal policy does _NOT_ sound like global cooperation to me, although again if a lot of this is in ‘tax rebates’ to the politically well-connected it will be unstimulative but of less impact on currency/rate issues.

    Personally, I do not expect that we will get serious global cooperation on rates and currency alignments until we have multiple bond fails in different economic zones from excessive public issuance and sub-zero real returns. Say, by 4Q 09, or into 10.

  39. Anonymous

    pk said…
    Their economy isn’t diversified”

    What is difersification? Obviously their budget and export/import balance says it’s diversified enough to fullfil whatever they need internally.

    Our diversified economy? Like exporting CDS and Walmart?

    Seriously. Like I say, we are the laughing stock of the world right now. Too much BS and spinning, can’t show the cash.

    mxq said…
    i don’t care how liquid or flush with cash any country is, if there is a mass redemption of fdi…they’re in trouble.

    Most countries are very aware about that, hence the pile of dollar reserve after 97 crisis. This pile was partly what drove dollar over valuation.

    Also, almost all countries has strick regulation about how much private entity can bring/borrow dollar. Eg. China’s talk about hot money/hussling banks about hot money. Or in extreme case Iran flushing dollar right after they get it.

    And the biggest one of course was the formation of Asia Monetary Fund. It’s specifically designed to fight hot money liquidation.

    It will take more than a group of hedgefunds to bring down an asian country (as oppose to Icelands)

    It would be easier to bring down Canada or UK by liquidating fdi/excange dumping than places that was attacked during ’97.

  40. Anonymous

    pk said…
    Their economy isn’t diversified, all their eggs are in one basket and they have absolutely zero control over the basket and its fate. “

    Ludicrous statement considering our so called “diversified” economy can’t do jack against world competition to achieve surplus.

    Diversified like what? CDS and walmart? Obviously their economy is diversified enough to satisfy internal market and more.

    I’d take Russia’s savvy political play and weapon trade policy over Bush idiocy any time. It makes money and doesn’t kill the economy.

    I may not agree with weaponizing the world, but they get something that people wants to spend good money on.

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