Victor Shih on the Risk of Capital Fleeing China

We’ve written about Victor Shih’s work on Chinese banks and wealthy households. He argues that the Chinese financial system and economy are at risk if enough capital moves overseas. While the release of this video is coming at a juncture when the US and Europe seem to be engaged in a beauty contest between Cinderella’s stepsisters, Chinese business have been making aggressive investments in other economies as well, such as agricultural land in Africa, so it’s worth remembering that advanced economies are far from the only targets for offshore funds.

This video gives a short, high level overview of his provocative thesis. Enjoy!

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  1. PhilG

    Isn’t one of the advantages of state controller society that they could easily crush those who started the flight and thus deter the others from considering it?

    1. Cedric Regula

      It’s scary to think what would make Chinese private money think the good places are somewhere else in today’s world.

    2. psychohistorian

      Why would they do that when they are doing it themselves.

      Who in their right mind would consider holding US Treasuries of any volume if they don’t have to? No amount of nukes are going to continue to prop up the monetary value of our imperialistic banana republic for much longer.

      The clock is ticking louder theses days.

      1. mannfm11

        Looks like they want the treasuries pretty badly. Might it be that treasuries are the same thing as money and they bear interest, thus they can invest their money and keep it too? Seems to be massive lobbying for the debt ceiling to increase and despite all the default nonsense talk, rates have actually reacted very little? How does China transact with the outside world without access to the international banking system? The link is treasuries.

        1. psychohistorian

          I have postulated on this forum before that the US dollar as Reserve Currency has less than 10 years left, IMO.

          I still stand by that.

          1. Cedric Regula

            You can buy RMB futures in Chicago now, so it may not last that long.

            Of course if China’s banking system has a Minski Moment and they can no longer make loans and get reserves/deposits later, then that means they ran out of capital and went Kaput, or however that’s spelled in Chinese. Then China will have to figure out what to do about that.

            Then the dollar will get a reprieve for a while. Sort of like when everyone thought Japan was going to take over the world and went Kablooee instead. Doing biz with the US seems dangerous, or at least jinxed.

            Course we may have to close the US by then anyway for any number of reasons. Possibly because we are going to make so much money creating treasury bonds. Could happen.

            Getting in on the ground floor in Africa for Civilization II may not be such a bad idea afterall.

        2. linrom1

          Mann when are you going to update your blog? In my opinion nothing has changed since you posted(couple of years ago) that the US$ was serving as collateral for global currencies.

          US Treasuries are bought with recycled dollars, so as long as US consumers keep spending, ROW can afford to buy a few T-Bills–it’s the cost of doing business, ie paying sales tax.

          OT—Your thinking on US global corps cash horde is spot on. If you could expand on this as you alluded on HT, that would be great.

      2. Up the Ante

        “No amount of nukes are going to continue to prop up the monetary value of our imperialistic banana republic for much longer. ”

        Are they fanatic enough to use them when they see their cookie has crumbled?

      3. Up the Ante

        Would BP use Nalco’s Corexit, the most toxic dispersant?

        BP’s the biggest supplier of petroleum to the military, maybe they know if the nukes would be used.

  2. Skippy

    From my observations, Vietnam is China’s new labor market, currant world economic formula doing the rounds…eh. Then you have all the upper class Chinese running all over the joint (region of influence) and investing in all manner of things, big and small.

    Skippy…what happens when there is no longer any untapped labor, how long will it take for saturation, What will the market say when you can’t screw them down any more, its the preferred metric for all investment observations, [??????] IDK, chump change for everyone save the top.

    1. K Ackermann

      Simple. Manufacture a famine somewhere. Working for a bowl of rice per day probably sounds good to someone with a distended belly.

  3. Hubert

    Very interesting. I googled for a transcript to really memorize the thing. Have not found one so far. If anybody has it or another link to Shih, I would be very interested …

  4. Alex

    Victor Shih is right. Western observers take a “hear/see/speak no evil” mentality when it comes to China’s financial system, frequently overlooking the system’s rickety foundations and its massive shadow component. There is no doubt that recent events, such as the IPO filings by China’s largest state banks, and the surges in the time-bomb that is its forex stash, indicate a growing weakness in the country’s financial sector.

    Who cares if the USD remains the reserve currency? It has caused the US immense pain, by letting countries like China and Japan bleed the US dry via massive purchases of freely available/widely held USD in order to manipulate their currencies and, by extension, their trade positions. The US bond market is the feeding troth for every wannabe trade surplus nation.

    Michael Pettis has eloquently argued that the US should *encourage* other countries to dump the USD as a reserve currency; but he realizes that this won’t be easy, due to how deeply ingrained the USD is international commerce and how deficient (the RMB isn’t even freely floating and the Euro is hostage to a 27-nation bloc) its “rivals” are:

    The US should push for the RMB, or even the Euro or the Yen, to be the dominant reserve currency. Then the US could buy up currency and bombard China, Japan, and Germany with cheap exports.

    Alas, at the moment, there are not many alternatives to Treasuries, especially when it comes to trade surplus nations who have out-of-control account balances issues. Default or no, China and its ilk will have to keep buying Treasuries; if they don’t, the value of their own currency would soar, perhaps in tandem with interest rates, which would only further expose the decay within China’s banking system.

  5. Juan

    A new wave of factory closures threatened in China

    By John Chan
    26 July 2011

    The closure of two major plants in Dongguan—one of the key manufacturing hubs in southern China—is a sign that the government’s credit tightening policy to curb rampant real estate speculation is unexpectedly threatening a new round of factory closures.

    Remainder –

    Apparently SMEs [and some large firms] have not been/are not doing well in today’s China.

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