2016-12-01

Torschlusspanik Begins: China Implements Capital Controls

Well, there's no point in warning people about a collapse in the Chinese yuan anymore because there's soon to be no way out. Renminbi is turning back into something similar to Disney dollars, which are valid only in the theme park.

SCMP: China’s central bank caps yuan’s outflow to stem currency’s slump
Non-financial companies domiciled in China will be limited to lending the equivalent of 30 per cent of the owners’ equity to an overseas company in yuan, according to a November 26 circular by the People’s Bank of China, a copy of which was obtained by the South China Morning Post. Both the lender and the borrower must share an existing shareholding relationship, the document said.

...On Monday, the Shanghai branch of the State Administration of Foreign Exchange said approval from the authorities was required for applications for cross-border payments exceeding US$5 million meant for overseas investment purposes, according to sources.

The government has also tightened checks on overseas acquisitions and imposed rules to make it more troublesome to bring yuan abroad.
With the new curbs, Beijing is shifting its emphasis from propping up the yuan’s value in the currency markets to blunt controls for taking it offshore.
And there was the restriction on gold imports yesterday. Everyone seems to be focused on how this is a reversal of China's plans to internationalize the renminbi, yet ignores the more obvious explanation: liquid reserves are close to exhausted or are projected to exhaust if the U.S. dollar continues to appreciate.

The news comes on the same day a Hurun report said yuan devaluation fear has 60 percent of HNWIs wanting to buy property overseas: 担心人民币贬值,超6成高净值人群欲海外购房投资
"I think for most Chinese HNWIs, the current global asset allocation is to buy a house and foreign currency deposits, it's that simple,"
The market is priced for perception, not reality. If perception aligns with reality then you have stability. When it deviates, there is mispricing and risk for profit to the up and downside. I don't have a magic insight into market perception and others may have a better read, but my take is that while the renminbi depreciation crowd has bigger megaphone since August 2015, it is still a small minority position. I don't sense that the bulk of investors are properly assessing the risk of a major devaluation of the Chinese currency, even as the evidence for it is piling up at an accelerating pace.

The U.S. dollar remains key. If DXY turns back below 100 and stays there, the odds of an acute crisis fall. If DXY is already on the way to 120, watch out.

Short of an extreme crisis, the yuan is unlikely to be the biggest loser from a yuan devaluation. However, I suspect the yuan is still the largest domino in the market. A big depreciation in the euro or yen could shock the market, but yuan devaluation will spark much greater panic.

Also relevant: Horseman Capital Asks "Is China Running Out Of Money"

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