China Can't Stop CNY Outflow Because It's Flowing Through Current Account

There is hot money in China but it flowed in via the current account, not the capital account.

Balding's World: Why China Does Not Have a Trade Surplus
The differences between import and international payment data, however, is astounding. Whereas Chinese Customs reports $1.68 trillion and SAFE report $1.57 in goods imports into China, banks report paying $2.55 trillion for imports. In other words, funds paid for imported goods and services was $870-980 billion or 52-62% higher than official Customs and SAFE trade data. This level of discrepancy is extreme in both absolute and relative terms and cannot simply be called a rounding error but is nothing less than systemic fraud.

...There are a number of important conclusions and implications of the data presented here. First, if we adjust the Chinese traded good surplus on a cash flow basis and include the trade deficit resulting in a net export deficit, Chinese GDP growth in 2015 grew only 0.3%.

...Third, this sheds new light on the state of Chinese finances and RMB outflows. For instance, the differential between Customs and bank data reveals rising outflow discrepancies since 2012. While many have begun to worry recently about rising pressure on the RMB, it is clear that outflows from China are long lasting, large, and completely domestically driven.

...Sixth, the nature of capital flight from China cuts directly to the heart of why capital controls would be a poor remedy. Capital is not leaving through the capital account. Rather with a restricted capital account and a relatively free international transaction via the current account, enterprising Chinese are moving capital via the current account. To arrest the flood of capital leaving this way, it would require China to bring goods and services trade in the world’s second largest economy to a complete standstill.
Fake export invoicing caused the yuan to rally in 2013, as I covered in How Fake Exports Caused The Yuan Rally. That was back when companies were importing money by the boat loads to arbitrage interest rate differentials, investing in WMPs and other high yield assets. The aftermath (to this point) was covered earlier this year in a Chinese article, which I posted here: Why the Yuan Must Devalue: $700 Billion in Short-Term Loans Betting on Yuan Appreciation & Rate Arbitrage; One-Third of Reserves Is Hot Money. In addition to reversing the prior trades, domestic Chinese business with ample bank credit and currency depreciation expectations are undoubtedly be running the arbitrage in reverse.

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