A year after global markets were shaken by a
surprise China devaluation, they are now becalmed, and pressures for an exodus
of capital from the nation have eased.
Diminished expectations for U.S. interest-rate
increases have helped stem the tide. Authorities also have cracked down on
savers squirreling money out through everything from dubious invoicing to
purchases of overseas insurance products.
On the economic front, stability
reigns for now. The nation’s foreign exchange reserves have
leveled out at around $3.2 trillion, and data Tuesday showed a streak
of factory-gate
deflation may be coming to an end after more than four years. Other
indicators suggest overall economic growth is holding up and the People’s Bank
of China has signaled it isn’t in a hurry to cut interest rates, even as it
adds stimulus through other channels.
Authorities soothed concerns by promising not
to devalue the yuan in order to help exporters. Even as the yuan has weakened
about 2.4 percent against the dollar this year, markets have grown comfortable
with the country’s new trading mechanism -- taking panic out of the equation.
Having said all of that, cash is still leaking
out of the world’s No. 2 economy. That means worries won’t go away that sudden
yuan weakness could trigger another burst of destabilizing capital outflows.
"All it takes is one snowballing rumor of
policy change or further renminbi devaluation to trigger the next rush for the
doors," said Pauline Loong, managing director at Asia-Analytica Research
in Hong Kong. "The domestic mood is one of worry and uncertainty."
Case in point: when the yuan fell about 1
percent against the dollar and 2.2 percent versus a trade-weighted index in
June, some $49 billion worth of foreign exchangeflowed
out, up from $25 billion in May, according to Goldman Sachs Group Inc.
Analysis by Nomura Holdings Inc. of Chinese
imports in the six months through June found that capital outflows may have
been disguised as imports from tax-haven and offshore financial centers.
Shipments from Samoa soared 723 percent over the period and those from the
Bahamas rose 354 percent, according to the Nomura analysts led by Yang
Zhao. At the same time, overall imports fell.
It isn’t just suspicious imports that are being
used to get money out from China. Companies are fabricating business
transactions in places like the U.S., according to Dan Harris, a Seattle-based
lawyer and founder of Harris Moure LLP who specializes in providing legal
assistance to companies doing business in China.
"There are fake deals, lots of them,"
Harris said, adding that his firm routinely turns down transactions it deems
suspicious.
In one case in February, a person claiming to
advise a Chinese manufacturer asked him if Harris’s firm could orchestrate a
fake arbitration proceeding in the U.S. for a $3.5 million breach of contract.
The Chinese company wanted Harris to set up a U.S. company and help fabricate a
case to convince Chinese regulators that it needed to get money out of China to
pay "damages" to the U.S. company.
Other tactics used by Chinese companies include
paying for overseas consulting contracts that don’t deliver any services,
fabricated technology licensing agreements with overseas providers, or the fake
acquisition by a Chinese company of an offshore entity, Harris said.
The weakening yuan also prompted China’s
investors to pile into equities in Hong Kong, where the currency is pegged to
the greenback. Mainland traders have bought a net 93.1 billion yuan ($14
billion) of shares listed on the city’s stock exchange this year, according to
data compiled by Bloomberg tracking investments via the exchange link with
Shanghai. By contrast, net inflows into mainland equities via the two-way
channel have amounted to 26.6 billion yuan in the period.
Much of the money that has left China is still
unrelated to capital flight. Companies have paid down foreign debt and have
pursued legitimate investments. The outflows also reflect asset diversification
and parents paying for their children’s education abroad.
It’s also been a record year for Chinese
companies buying overseas assets, with $157.2 billion of announced deals so far
this year. That volume of activity hasn’t gone unnoticed by China’s regulators,
who have increased their scrutiny of foreign acquisitions and in some cases
have blocked deals outright.
Still, even as money heads out through some
channels, it’s coming in via others. Foreigners’ holdings of Chinese stocks
climbed to the highest in a year in June. Bond inflows that month also rose the
most since 2014 as the government increased overseas access to the market and
the nation’s relatively high yields lured investors.
China also has a healthy trade and current
account surplus to act as a buffer, said David Loevinger, a former China
specialist at the U.S. Treasury who is now an analyst at fund manager TCW Group
Inc. in Los Angeles.
"So even if it has net capital outflows,
as long as they’re not too big or too sudden, then I think China and the PBOC
can manage it," Loevinger said.
The ballgame may change should the U.S. Federal
Reserve resume raising interest rates more aggressively than currently
forecast, strengthening the greenback and weakening the yuan. Then there’s the
risk of policy error.
"If something shocking happens like last
August or early this year, when everybody was worried about the systemic risk
of China, then this process will definitely accelerate, leading to panic
capital flight," said Harrison Hu, chief greater China economist at Royal
Bank of Scotland Plc, referring to the process of asset diversification.
Source: Bloomberg