China: Why the RMB keeps wilting


Tuesday, December 20, 2016 // Written by Enzio von Pfeil

China's Economic Time® has worsened. Avoid her and thus Hong Kong's stock markets

  1. Changed Economic Clock®

    On 16th December we highlighted China's change in Economic Time®: her previous excess supply of money has morphed into an excess DEMAND for money, courtesy of the PBoC having to support the RMB by buying it from the market.
  2. The constituents of capital outflow

    During the first nine months of 2016, here is what the capital outflows consisted of:  US$ 301 bn (bank lending and securities investment); $135 bn (errors and omissions), and $117 bn (outbound foreign direct investment).
  3. Currency mismatches when borrowing

    As you see, the bank lending  (and securities investment) dwarfed other capital outflows during the first three quarters of 2016.  Let's explore this a little further. According to the Financial Times of 19th December 2016, p. 2: "Much of this lending came  in the form of trade finance.  When the Renminbi was appreciating against the dollar, Chinese importers eagerly borrowed in dollars, Such borrowing was effectively a bet on the Chinese currency appreciating because, in Renminbi terms, dollar debt was cheaper to pay back by the time the loan matured.  Now, outflows are occurring as importers repay foreign loans and shift to local financing." So, in plain talk: importers now are pre-paying their existing dollar-denominated borrowings on account of having been wrong-footed by the direction of the dollar and thus RMB.
  4. Securities investment

    No prizes for identifying increased capital outflows due to more attractive overseas markets, aka America and Japan.
  5. Conclusion

    Thus, contrary to the popular view, the bulk of the RMB's depreciation is being driven by importers pre-paying their dollar loans - and not because of capital flight (aka "errors and omissions"). Thus, even though HKMA boss Norman Chan expects current curbs on China's capital outflows to be "just a temporary fix", we respectfully differ: the momentum of outflows keeps gathering pace, fuelled initially by currency mismatches and Pres. Xi's anti-corruption drive. 
  6. Investment implication for the Evidence-Based Investor

    Given that Fama-French identified the market itself as being one of the three most important drivers of stocks' price  variability, expect China's increasingly pronounced "excess demand for money" to stymie assets investments in the Chinese and thus Hong Kong stock markets. 
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