TOKYO -- For the moment, Chinese authorities' efforts to calm the equity and currency markets appear to be having their intended effects. Outflows of funds, however, pose a pressing challenge despite the government's capital controls.
Speculators are winding down positions in anticipation of yuan appreciation. The rich are also scurrying to shift money offshore, likely fearing they could become targets of President Xi Jinping's anti-graft campaign.
The collapse of China's stock bubble in June, followed by the yuan devaluation that jolted the global markets in August, may have interrupted Xi's drive to weed out corrupt officials and cement his grip on power. But politicians and wealthy individuals remain very much aware of the threat.
They may get shivers when they see playing cards featuring the portraits of officials caught in Xi's dragnet. A former Japanese government official who recently returned from China had one of the decks on hand; the two joker cards were adorned with pictures of the biggest "tigers" caught, Zhou Yongkang and Bo Xilai. To some, the fact that such cards are circulating might seem like a bad omen.
Following the trail
UBS Group of Switzerland estimates that $324 billion streamed out of China last year. Bloomberg, the U.S. news service, published an article on Nov. 3 headlined "China's Money Exodus."
"The Chinese spent almost $30 billion on U.S. homes in the year ending last March, making them the biggest foreign buyers of real estate," Bloomberg wrote. "Their average purchase price: about $832,000."
Beijing limits foreign currency transfers by individuals to only $50,000 a year. So how do they spend so much? The Bloomberg article identified various ways China's wealthy get around the rules, from using Hong Kong money changers to swap yuan for dollars, to divvying up cash and having multiple people carry it abroad, to buying high-priced watches and then selling them for cash overseas.
Property markets in Hong Kong and Sydney are feeling the impact. In some ways, the situation is reminiscent of the Japanese property bubble in the late 1980s; as it happens, Chinese buyers continue to show a strong appetite for Tokyo real estate, too. But unlike in those heady days, Chinese politicians and business owners are pouring money into property, in part, as a way of preparing for the worst.
The Wall Street Journal last Saturday reported that some 800 billion yuan ($125 billion) left China through underground banks in the April-October period, citing an estimate by the People's Bank of China. To put that in perspective, China's capital outflow, through various channels, exceeds its consistently solid current-account surplus.
If the nation's uncertain economic outlook drives more money away, the yuan may face strong selling pressure. The currency's depreciation could cause an unexpected liquidity squeeze. That is why the central bank has been conducting yuan-buying interventions of late. The People's Bank has been left with no option but to use the country's foreign currency reserves to offset the outflows.
Those reserves fell by $113 billion in the January-March term, $36.7 billion in April-June and $179.7 billion in July-September, for a total decline of roughly $329.4 billion. The sudden devaluation of the yuan in August likely accelerated the capital flight.
By the end of October, China had regained some lost ground, with the reserves up by $11.4 billion on the month -- reaching a total of $3.52 trillion. The authorities may have intensified a crackdown on illegal money transfers. But even if they manage to close the back door, money is also leaving via the front.
Numerous Chinese companies have issued dollar-denominated bonds to take advantage of low U.S. interest rates, and those offshore debts will eventually mature. At the same time, Xi's government is actively pursuing investments in overseas resources and infrastructure.
China recently agreed to build a high-speed railway in Indonesia. It also closed billions of dollars worth of deals in the U.K., including major investments in British nuclear power projects. The list goes on, and it is likely to get longer.