Funny Num­bers Show Money Leav­ing China

The Economic Times - - Money - CHRISTO­PHER BALD­ING

News that China’s for­eign-ex­change re­serves rose by $10 bil­lion in March rather than de­clin­ing has qui­eted doom­say­ers. Wor­ries that the re­serves could dip to dan­ger­ous lev­els as soon as this sum­mer, af­ter shrink­ing by an es­ti­mated $1 tril­lion last year, ap­pear to have been pre­ma­ture. Still, ques­tions linger over ex­actly how much money is leav­ing China and why. The true pic­ture may not be as rosy as the head­line num­bers sug­gest.

Be­fore the March up­turn, cap­i­tal had been flood­ing out of China at a rapid clip — an av­er­age of $48 bil­lion per month over the pre­vi­ous six months, ac­cord­ing to of­fi­cial bank data. The rea­sons were sev­eral. Fear­ing fur­ther de­clines in the value of the yuan, sev­eral com­pa­nies paid off their dol­lar loans; oth­ers pur­sued big ac­qui­si­tions abroad. In­di­vid­ual in­vestors sought out higher re­turns as the Fed pre­pared to raise rates. The govern­ment spent bil­lions to prop up the value of the cur­rency. Some in­di­vid­u­als and com­pa­nies re­duced their off­shore yuan de­posits. Still oth­ers looked to spirit money out of the country to safer havens. The ques­tion is how much money has been leav­ing for which rea­sons. Some an­a­lysts, in­clud­ing econ­o­mists at the Bank for In­ter­na­tional Set­tle­ments (BIS), have ar­gued that the bulk of th­ese out­flows are healthy, mostly in­volv­ing com­pa­nies pay­ing down their for­eign debt. How­ever, the BIS study, which es­ti­mates that such re­pay­ments ac­counted for nearly a quar­ter of the $163 bil­lion of non-re­serve out­flows in Q3 of 2015, fo­cuses on a very nar­row slice of time. For­eign debt obli­ga­tions grew rapidly in late 2014 and the first half of 2015, then shrunk dra­mat­i­cally inQ3.

More­over, what those of­fi­cial fig­ures miss are hid­den out­flows, dis­guised pri­mar­ily as pay­ments for im­ports, which ap­pear to have cre­ated a $71 bil­lion cur­rent ac­count deficit in the same quar­ter, ac­cord­ing to bank pay­ments data. In ef­fect, en­ter­pris­ing Chi­nese are over­pay­ing mas­sively for the prod­ucts they’re im­port­ing. Chi­nese cus­toms of­fi­cials re­ported $1.68 tril­lion in im­ports last year. Banks, on the other hand, claimed to have paid $2.2 tril­lion for those same im­ports. While the of­fi­cial bal­anceof-pay­ments records a cur­rent ac­count sur­plus of $331 bil­lion in 2015, banks’ pay­ments and re­ceipts show a $122 bil­lion deficit.

Over­pay­ing for im­ported goods and ser­vices is a clever way for Chi­nese com­pa­nies and citizens to move money out of the country sur­rep­ti­tiously. While some dis­crep­an­cies are to be ex­pected in data like this, the size and steady in­crease in the gap since 2012 im­plies that some­thing shadier is go­ing on. When Chi­nese com­pa­nies pay down debt, or make big ac­qui­si­tions abroad, they do so openly. Th­ese other out­flows — which topped half a tril­lion dol­lars last year — seem far more likely to be driven by in­di­vid­u­als and com­pa­nies sim­ply seek­ing to get their money out of the country.

The tim­ing is also telling. The dis­crep­ancy be­gan to grow rapidly in 2012, just as growth peaked and con­cerns be­gan to rise among af­flu­ent Chi­nese about the econ­omy and a po­lit­i­cal tran­si­tion. Since then, fake im­port pay­ments have grown from $140 bil­lion to $524 bil­lion in 2015.

Dur­ing that pe­riod, growth in China has slowed, rates of re­turn on in­vest­ment have de­clined and sur­plus ca­pac­ity has ex­ploded. The Chi­nese econ­omy is groan­ing un­der mas­sive over­ca­pac­ity, with growth slow­ing and fi­nan­cial risks ris­ing. Nei­ther a cut in in­ter­est rates nor an­other stim­u­lus pack­age is go­ing to re­lieve that long-term pes­simism. If China’s lead­ers want to pre­vent cap­i­tal from leav­ing the country, they’re go­ing to have to ad­dress the rea­sons for the flight. — Bloomberg

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