$1 trillion in capital left China in 2015.
That’s worse than even the most bearish China analysts could have even imagined.
A few numbers put this in perspective:
- The monthly average of outflows from China used to be $11 billion a month.
- In the first six months of 2014, $26 billion left China.
- In all of 2014 $134.3 billion left China.
- The Chinese government predicted about $455 billion in outflows for 2015.
- In October, the US Treasury estimated that capital outflows from China hit $500 billion in the first eight months of 2015.
In other words, the situation has deteriorated very rapidly, and everyone got it very wrong. Last year, China’s foreign exchange reserves dwindled for the first time since 1992. (They fell by $513 billion to $3.3 trillion.)
A Bloomberg News survey found that investors think that, this year, reserves will fall another $300 billion. Of course, that was taken before everyone knew how bad the 2015 outflow situation was.
No one has time for this
The precarious situation comes at a delicate time for the country. China is undergoing the crucial transition from an economy based on investment, to one based on consumption. It’s battling problems like debt and overcapacity and growth is slowing. To deal with all of this, the government needs its reserves.
You can blame a good portion of this on the depreciating value of the yuan, which has spurred holders of the currency to ditch it for something more stable.
Analysts were also way too rosy on how that would shake out, though.
“The risk is that depreciation triggers capital flight, dealing a blow to the stability of China’s financial system. Our calculation is that a 1% yuan depreciation against the dollar triggers about $40 billion in capital flight,” Bloomberg economist Tom Orlik wrote in a note this summer.
The yuan has depreciated around 5% against the US dollar over the last year so, yeah, that $40 billion figure turned out to be a little low. (At Orlik’s expected rate, outflows should have been about $200 billion.)
In December alone, the government spent $108 billion to stop the yuan from falling too fast.
In September, star China analyst Charlene Chu — known for her bearish outlook on China’s credit and liquidity situation — wrote out a dark scenario on foreign exchange reserve depletion. Her worst case scenario saw outflows from September to December 2016 hitting $180 billion. For the full year of 2016, they would hit $540 billion.
If that played out, she posited, China’s liquid reserves would come to equal only 80% of the International Monetary Fund’s precautionary requirement.
Right now even her estimates seem conservative.
Don’t talk about it
That is why the Chinese government has undertaken the gargantuan task of stabilizing the yuan.
Of course, the government has tightened capital controls (though businesses find ways to get around them).
But, more colorfully, it’s also started threatening and short squeezing yuan traders into submission. In an editorial on Monday the government said that traders shorting their currency should expect to suffer huge losses.
It even went as far as to warn legendary hedge fund manager George Soros, who famously squeezed the British pound, to stay away. Soros said that China was bound for a hard landing last week at the World Economic Forum in Davos.
This is how you know things are serious.
Another way to tell: After the $1 trillion figure came out, a Chinese official gave a speech about the risks of currency outflows. He was swiftly arrested for corruption — a common feature of President Xi Jinping’s China.
That’s a too-common solution for extraordinary circumstances.