China Capital Outflows Continue and PBOC Just Stepped On The Gas

The recent rate cuts by the PBOC are partially a response to capital flowing out of China. Those rates cuts will accelerate the outflow of capital though, because the asset prices are inflating and the currency is overvalued. The yuan is inflating via credit creation, feeding into asset inflation in real estate and equities, and the yuan is overvalued because it is tightly linked to the U.S. dollar. Overvalued currency + rising domestic asset prices = massive outflows. Headlines such as Chinese Home Purchases in Spain Rise 25% in 2014, Double in 5 Years and CREDIT SUISSE PREDICTS CHINESE WILL BUY $47.6B IN AUSSIE HOMES will be coming fast and furiously. As home and equity prices rise in China and the currency remains tied to a strong/rising U.S. dollar, Chinese will have a massive real incentive to swap their homes and equities for foreign homes and equities.

Meanwhile, the government wants the IMF to add the yuan to the SDR, which is why the capital account will open further. Capital outflows will intensify as the door opens.

The Hot Money Cools on China

While the world marvels at the rise of Chinese stock prices, money is quietly leaving the country at the fastest pace in at least a decade. Louis Kuijs, Royal Bank of Scotland’s chief China economist, estimates that China lost $300 billion in financial outflows in the six months through March. Deltec International, a Bahamas investment firm, puts the number even higher.

This is an historic reversal. From 2006 until last year, China’s reserves of foreign currency quadrupled to $4 trillion.