Spike in Hong Kong Imports: Currency Outflows; The World Wants China's Dollars

As I speculated yesterday, the outflows are indeed currency outflows.

Bloomberg: Phantom Goods Disguise Billions in China Illicit Money Flows
A steep rise in China’s reported imports from Hong Kong has raised concerns that trade invoices are being manipulated to get capital out of the country amid fears the yuan will continue to weaken. February data released Tuesday show those imports jumped 89 percent from a year earlier, even as total imports fell 14 percent. While the rise wasn’t as great as in January, economists said the spike follows similar patterns in recent months that point to companies using trade channels to pay for goods far in excess of their value or even that don’t exist at all.
This is as Christopher Balding has argued, the outflows are moving through the current account.

While I have covered the large amount of carry traders (most recently Carry Trade Outflows A Powerful Force), this is really a global run on the U.S. dollar. Although not the best analogy, the world is short of USD and the U.S. is exporting less due to higher oil production and lower deficits. Where can people obtain dollars from? China has a big stockpile. The outflows are being driven by Chinese because the yuan is overvalued domestically, and the dollar is more valuable overseas. In order to bring this into balance the global deflation must end or the yuan must depreciate. Since the PBoC cannot control global deflation, it is playing a waiting game, hoping it can outlast global dollar deflation. If deflation continues, eventually China will realize the only thing it can really control is the exchange rate, and the way to make outflows unattractive is to raise the price of USD domestically via devaluation. Until then, pulling USD out of China will be attractive for Chinese consumers, investors and businesses.

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