Sep 28, 2015, 9:50pm PST.
After we wrote “The State of the Market, Sentiment and Long Term Positioning” at Sep 8, 2015, 6pm PST. There were 3 more policies to restrict individual as well as companies to exchange RMB to USD in China. Today, we see the 4th policy: China WILL restrict getting foreign currency via “UNIONPay” at 100,000 YUAN or $15,700 per year, starting Jan 1st, 2016. Almost every bankcard in China has UNIONPay, and foreign currency withdraw used to be costy and not included in $50k limit for each Chinese.
This is another step to tighten control of wealth outflow. It confirm our source’s visiting of banks in China that the rules to get foreign currency was tighter than public information. We consider this as naive as most policies before and might only cause more panic rush to USD.
Thus it is good to re-visit China’s foreign currency. Here is our previous analysis at Sep 8, 2015, 6pm PST:
China companies own about 1.5 Trilion USD to foreign creditors; its factories need 1 Trillion to buy raw materials. that left only about 1 trillion USD for exchange. while China’s M2 account for 59% of world’s total M2 in 2011. It is just for about each Chinese to get $1000 dollar, or 1/500th of their house price. I see a rush to exchange USD very soon and RMB will lead to panic in a matter of months if not weeks.
We want to point out 2 additional sources of foreign inflow: the 1.5 trillion USD of hot-money inflow from the 35 years before 2015 because of strong RMB appreciation during that period(Goldman Sachs); and total direct investment from 1980~2014 at 1.5 Trillion USD (World Bank data here). These reversal of the two sources will add pressure to the $3.5 Trillion reserve.
We think the first wave of capital withdraw are hot-money and shrewd business man like Martin Lee Ka-Shing of Hongkong, this also includes large wave of real-estates buying in foreign countries by wealthy Chinese. We predict that the 4 new policies in Aug to restrict Chinese to get foreign currency will trigger average wealthy Chinese to sell Yuan for foreign cash. Especially when there are 5 macro-economic data in Aug are all confirming each other that Chinese economy are fast deteriorating.
All industrial profit decline: -8.8%
Railway transportation decline： -15%
Import decline: -13%
Wealth outflow： 180 Billion USD (Goldman Sachs)
We wrote in Feb that “China Rate Cuts will likely hurt China”. Further, we agree with Goldman Sachs that there are not much room to cut interest rate. In the meantime, we also continue to believe that an economic crisis that can quickly damp housing price and stock price, reduce wealth outflow, kill low efficiency companies and transfer their clients to more efficient companies, are in the best interest of China in the long term. We also believe that popping stock price of Chinese startup companies without their merit and effort, will not encourage their working hard to prove themselves, and will not promote innovation in China. We also believe limiting the access of Google, gmail, Facebook, Twitter and slowing down Internet to West are also very expensive for China’s innovation efforts, due to their invaluable roles in information search and propagation.
The sudden increase of exodus of wealth after Aug 11 RMB devaluation has forced policy of China to be on the defense. Devaluing yuan will trigger panic rush to USD, while keep it will mean continue bleeding wealth heavily when other central bankers are cutting rate, devalue currencies and grabbing export market. We think China will have to devalue RMB to keep employment. PIMCO predict RMB to devalue 7% in the year ahead, similar devaluation are projected by several other leading banks such as Goldman Sachs.
Sep 28, 2015, 9:50pm PST.
Disclaimer: We are not interested in any politics other than making money from sharp economic analysis.
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