Money is fleeing China. That’s hardly news, since it’s been happening for well over a year now. More accurately, money is now seriously fleeing China – at a rate which shows how little confidence anyone has in the dragon. The mythical creature apparently is made from a wall of paper, but it bleeds like any other economic animal – green, not red.
While the throes of this beast are roiling stock markets all around the world the truth of the matter is that money leaving China has to go somewhere – and “somewhere” is going to be primarily in the US. The situation is much more like Japan circa 1990 than nearly anyone has admitted yet. Where the growing Shia-Sunni war in the Middle East is going to be the policy story of this year, the inflow of Chinese money is already shaping up to be the economic story of 2016.
Barataria has been predicting this for far too long to be entirely credible, predicting the meltdown in the “shadow banking” system would take place in the summer of 2014. That call was a year too early at least. Given the size of the problem the unwinding will take place over at least a year, if not more, meaning the full effects won’t be felt until summer 2016. By that time, they will be huge.
Through the end of 2015, however, the pattern emerged. China pulls in about $250B a year through its “current account” – the money it earns making tools, toys, and just about everything else we all see at WalMart. That money was more than met by $550B in capital flowing out of the nation, nearly all of it in just the last six months.
It’s also still accelerating. It is very likely that trillions of dollars will have left by this summer, looking for a safe harbor to settle in. Longer-term Treasury notes are the safest bet for much of this money, which is why we’ve predicted that even in the face of a rising Fed Funds Rate the 10yr treasury will fall. When bond prices go up, the net yield on the interest goes down.
The low this week was 2.05%, down from 2.33% a month ago.
How bad is it in China? With their horrific pollution problems you can see (and even taste) a decent analogy to what incredible fast growth from a centrally planned economy gets you. For all the manufacturing infrastructure, China has essentially no native banking system at all. It doesn’t even have a consumer sector that is capable of absorbing the goods that they produce. It’s all about exports, which is to say they keep the population swimming through their air every day to make stuff for us.
It all went great as long as there were cities to grow and factories to build. Any slowdown in construction, however, means a sudden blip in unemployment – which cannot be absorbed by any other sector. And it’s all been financed by the money coming in, meaning it has to keep on keepin’ on or the whole house collapses.
That house is built on an impossible financial foundation, also centrally planned. Where China has always desired the prestige of being a “reserve currency”, which is to say a bankable, convertible form of money known around the world, it also wants to control the exchange rate and expand to meet the needs of the economy. You can’t have that and maintain control, however – it doesn’t work. As happy as they were when the IMF declared them to be a legitimate reserve currency it only accelerated the flight of capital.
On top of it, a communist government which could easily confiscate assets rapidly does not inspire confidence in people with a lot of money.
So the money is fleeing about as fast as it can right now, cutting China’s net foreign capital assets to the bare bones it needs to maintain trade. When that runs dry the only thing left to do is to print more or actually let if float – either way, it will sink like a rock. No one wants “the people’s currency” (“Renminbi” in Mandarin).
Where will this end? At some point, the US market will realize China’s loss is our gain – just as we did when Japan hit the wall circa 1990 and money fled that nation for US assets. This is the same process except about twice as large – and just in time for a big boom here starting in 2017.