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Sunday, 31 January 2016

Chinese implosion - part 2

On 9 January 2016, I published my blog Chinese implosion. Its last paragraph said "If this Chinese capital flight to safer harbours with a higher return accelerates - or gets "stopped" by the Chinese government - then this may finally become the tipping point for the imminent Chinese implosion. Its devastation will not stop at the Chinese borders though."

I suppose I missed the 8 January 2016 FT article: "China steps up capital controls to stem outflows". In its 20 January 2016 press release, the International Institute of Finance (IIF) claims that China had a $ 676 billion capital outflow (eg, FTIIF). A 27 January 2016 article by Bloomberg claims that China has a remaining $3.3 trillion of foreign exchange reserves. This reserve appears massive until you compare it with its population and its current capital controls.

Bloomberg: "Here’s another way of looking at the scale of the problem China faces: If just 5 percent of its 1.3 billion population sent the maximum $50,000 allowed out of the country, it would deplete the entire $3.3 trillion in reserves. Citizens frequently skirt the rules -- from pooling quotas to using so-called underground banks."

On 30 November 2015, the IMF approved the reserve-currency status for China's yuan claiming that the yuan meets the standard of being “freely usable”. The IMF reviews the composition of the basket every five years and rejected the yuan during the last review, in 2010, saying it didn’t meet the necessary criteria. The addition will take effect 1 October 2016. (eg, Bloomberg).

Interestingly, since the 30 November 2015 IMF decision, the yuan took an immediate dive: see the yuan/$ diagram to the left. The current dive of the yuan is market driven unlike the previous one in August 2015.

The big losses early August 2015 reflect the unexpected and consecutive devaluations of the yuan by China (eg, Bloomberg, CNNGuardian).

For 2016, the IIF expects that "China would see further large overall capital outflows as it continues to struggle against macro headwinds and to intervene heavily to stabilize its currency."

There seems to be an interesting kind of symbiosis: China needs the yuan to become a reserve currency in order to profit from its future currency demand. The USA and other countries could use the resulting transparency over China's true economic situation as this may indeed reveal that China is the new Japan (eg, BloombergCBS, FT, Forbes, IndependentZeroHedge).

The Chinese similarities with Japan refer to the strong Japanese economic growth until the early 1990s, resulting in an asset price bubble, financed by excessive loan growth quotas, Central Bank lowering interest rates, ultimately causing a stock market crash, and already two lost decades of economic growth ever since (eg, Wiki).

David Sylvian & Ryuichi Sakamoto (ex Japan) - Forbidden Colours (1983) - lyrics, Wiki


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