China Could Suffer $1 Trillion Foreign Capital Flight

China Stock Crash (Greg Baker / AFP / Getty)
Greg Baker / AFP / Getty

China’s official foreign capital flight was $300 billion for the year ending June 2015, and it could reach $1 trillion–assuming the People’s Bank of China is even providing reliable numbers.

Since June, China spent at least $300 billion stabilizing a $3 trillion stock crash–about $120 billion in the devaluation, $30 billion in foreign currency loans, and huge amounts of illegal capital flight.

There is an old Wall Street saying, “The easiest way to make a small fortune is to have started with a large one.” That could be a good description of China right now.

The official foreign exchange reserves of the People’s Bank of China rose from $2.3 billion in 1980 to a $4 trillion peak in June 2014, and back down to $3.7 in June 2015.

But since June, everything has gone wrong. The Chinese stock market suffered $3 trillion collapse, exports plunged 8.3 percent, car sales plummeted, Apple iPhone sales plunged, real estate is on the verge of a crash, and now China has devalued its yuan currency by 3 percent.

Breitbart News reported in early July that Beijing had to guarantee Chinese citizens from further stock losses because in late 2013 China President Xi Jinping’s “Silk Road” reforms had told citizens it was patriotic to buy stock. “Silk Road” aimed to “privatize” the risks of financing state-owned-enterprises off of the balance sheets of state-owned-banks and onto the balance sheet of the public. Over the next two years, the number of Chinese stock brokerage accounts for small individual investors grew from 20 million to about 100 million as the markets boomed.

As Stratfor’s John Minnich pointed out, “market capitalization of Chinese stock markets hovered around $1 trillion to $2 trillion” before the recent stock boom. At its peak on June 12, “China’s stock market capitalization, all the markets across the country, was something in the area of $10 trillion to $11 trillion.” With the market capitalization crashing to $7 trillion, China and its banks have spent at least $300 billion purchasing stock to stabilize prices. If the market has a “mean reversal” back to where it began, China could have to spend up to $6 trillion in reserves to protect small investors.

David Lubin, head of emerging markets economics at Citigroup, told the Financial Times that China has $943 billion in debt denominated in foreign currencies and $714 billion due this year, according to the Bank for International Settlements. China’s 3 percent devaluation means those Chinese companies now owe $30 billion more.

China’s devaluation is a “beggar-thy-neighbor” policy  aimed at weakening the yuan to restore competitiveness for exports, a sector that continues more than 20 percent of GDP.

UBS estimates a 10 percent depreciation in China’s real effective exchange rate could add 10 percentage points to export growth, with a lag of three months. But UBS also warns that a 10 percent depreciation against the dollar would risk capital flight of some $400 billion.

Rich and powerful Chinese are not going to sit back and watch the government erode their wealth through devaluations. There has already been what Wolf Richter calls “a tsunami of money from China” that has been illegally spirited out to invest in housing and other assets in trophy cities in the US, Canada, Australia, New Zealand and the U.K. Money laundering is undoubtedly accelerating.

The People’s Bank of China said yesterday that it would, together with China’s State Administration of Foreign Exchange (humorously referred to as “SAFE”), examine the banks’ foreign exchange transactions, “adopt effective measures to fight money laundering, terrorist financing and tax evasion activities, and improve the monitoring of suspicious cross-border capital flow.” It promised to “severely punish illegal FX transactions.”

China officially had $3.6 billion in foreign exchange reserves in June 2015. Given the size of its global trading, China probably needs about $2 trillion to finance transactions.

That gives China about $1.6 trillion in unencumbered “free reserves.” But adding up their foreign exchange losses, China may have already dropped $1 trillion on its way to making a big fortune into a small one.


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