The Herd Begins Moving Assets Abroad

Up until this point, outflows have mainly been driven by wealthy people moving assets out of China and into overseas real estate and investments. Financial reforms are opening up the world to smaller and less internationally savvy investors, and the recent dip in the yuan has spurred them to take advantage of new opportunities.

WSJ: Cash From China Is Boon for Hong Kong

China’s devaluation of its currency, its slowing economy and its tanking stock market have been a boon for Hong Kong’s money-changers, bankers and wealth managers, who are getting flooded with business from nervous Chinese eager to move cash overseas.

The flood of cash is affecting the HK dollar peg:

The flood of cash into Hong Kong has gotten so strong that the city’s de facto central bank was forced to act on Tuesday. In its first intervention since April, the Hong Kong Monetary Authority sold 15.5 billion Hong Kong dollars, or $2 billion, to the market in an effort to push down the currency, which was at the high end of the narrow band in which it is allowed to trade against the U.S. dollar.

At the same time as this is going on China Boosts Efforts to Keep Money at Home:

Some of the country’s largest lenders, including Bank of China Ltd. and China Citic Bank Corp., are beefing up their internal checks on large foreign-exchange conversions by corporate clients, according to Chinese banking executives.

Chinese companies can exchange yuan for foreign currencies only for approved business purposes, such as paying for imports or approved foreign investments.

Meanwhile, financial regulators, together with the country’s security forces, are stepping up efforts to rein in illegal money-transfer agents who make a living by helping people move money out of China.

I doubt these capital outlets will cause a breakdown in the yuan. What policy makers need to fear is a general run on the yuan. If ordinary investors decide the yuan will not protect their savings, they can buy gold, property, Bitcoin and overseas assets, including within China via an ETF tracking a foreign market. By shutting the door to capital outflows, China increases the odds of capital finding its way into an investable asset, one that will display momentum properties and attract the herd looking for a quick buck. All the government is doing here is diverting the flow into unforeseen directions.