More Evidence of Outflows Via Current Account

Last week I posted China, capital outflow and that over-reporting of imports problem, which covered the data uncovered by Christopher Balding, showing capital is moving through the current account.
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.
The evidence grows.

FT: China, capital outflow and that over-reporting of imports problem
We unveil the channels of capital outflows in this report and find that overreporting imports appears to be the most important channel of capital outflows (Figure 2). In 2015 the China Customs reported total goods imports of USD1.7tr. But the actual payment importers made was much higher, at USD2.2tr. The difference is a stunning half trillion of US dollars.

Where do we get the data on actual payment for imports? The State Administration of Foreign Exchange (SAFE) actually reports on a monthly basis how many FX transactions go through the banking system, and breaks down the transactions based on the balance of payment definition (such as goods trade). This set of data may not be well known outside the FX community; hence the lack of attention to this large discrepancy between bank payment data and Customs data.

How do we know this discrepancy reflects capital outflows? Because the size of such import discrepancy is linked to market expectations of the RMB’s future trends. For instance, it jumped from USD25bn in July 2015, right before the RMB fixing reform, to USD57bn in Aug and USD67bn in Sep (Figure 2). It subsequently dropped in Oct and Nov 2015 when the PBoC acted to stabilize expectations on the exchange rate, but then widened again in Dec 2015 and Jan 2016 with intensified RMB depreciation expectations.
Like a bucket with holes in it, the more liquidity you pour in, the greater the pressure, the faster the outflow.
The effectiveness of capital controls is also important for China’s economic outlook. Monetary policy has been loosened, as evidenced by the record-high new loans in January and the statement by the PBoC governor at the G20 conference about the monetary policy stance being “prudent with a slight easing bias”. But the policy easing would not be effective if the capital controls are not effective, as credit expansion would be offset by capital outflows.

Effective capital controls are not the panacea for China and would likely create new problems. The property bubble in some of the cities will likely become bigger as credit growth rises. Trade will become less convenient due to increased documentation requirements. Even legitimate outward investment such as FDIs may slow down. The fundamental problems in the economy and the FX market are still not resolved…

No comments:

Post a Comment