What Happens If Chinese Herd Wants Dollars?

A small portion of Chinese investors were on the hunt for greenbacks last week (Chinese Herd Crashes Online Banking System in Hunt for Dollars), but that was only a portion of urban investors. What happens if the herd shows up and buying USD becomes hot enough that all the aunties want in as well?

WSJ: China’s Jittery Savers Could Pose Capital-Flight Threat
China’s urban population in 2014 came to 737 million, according to World Bank estimates.

Assume that the wealthiest 1%, who easily have enough savings, convert the maximum allowed amount into dollars this year. That would amount to nearly $370 billion of outflows. If the top 2% of urban individuals do so, it would mean $740 billion of outflows. That is to say nothing of the many other ways to get money out of the country, legal or otherwise.
Pretty soon we're talking real money.

It doesn't make sense to focus solely on the wealthy though. Several hundred million Chinese have enough savings to purchase at least $10,000 of USD as an investment/hedge. If 10% of the urban public converts an average of $15,000, it comes to over $1 trillion.

It also isn't exactly outflows if the dollars stay in country. The central bank can't spend those dollars without taking a double short position against depositors who now have USD bank accounts being paid interest in USD. The central bank could at some point force conversion back to yuan though, either temporarily or permanently.

Back in 2012 I wrote, much too early:
The takeaway is that the Chinese people have turned into U.S. dollar buyers, which will drain foreign currency from the central bank. Interest rates should be rising to defend the currency, but they are instead falling, opening up the potential for more significant devaluation later this year, most likely after the U.S. dollar strengthens and euro weakens.

There may be no major crisis in the currency, but that will depend on how much capital the central bank expends fighting devaluation. The country has moved from the dollar peg to a currency basket and advanced the internationalized the yuan, which will allow for more dollar outflows and depreciation should the greenback rally versus the yen and euro.

Finally, a yuan depreciation of 10% or more would be far from an FX crisis, but it would shock financial markets that remain overwhelmingly yuan bullish, especially because it will come in the midst of a global crisis. The psychological effects of a yuan devaluation expressed in the financial markets will far outweigh the economic impact.

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