The Wall Street Journal carried a story yesterday indicating that China’s major banks have halted an experimental program, sanctioned by the country’s central bank, that helped citizens transfer large sums overseas. Among other places, this huge tide of flight capital ended-up in affluent west coast housing markets from Vancouver to San Diego.
Specifically, Chinese buyers last year scooped up $22 billion of US homes—a figure which was up a whopping 72% over prior year. Moreover, the average purchase price was nearly $600,000 or more than 3X the US median price, and overwhelmingly the purchases were all-cash. So this makes for some interesting statistics. Upwards of 40,000 Chinese buyers came barreling into the top 5% of the US housing market bearing bundles of greenbacks.
Here’s the thing, however. Under China’s closed and state controlled system of “red capitalism” no citizen is allowed to take more than $50k in cash out of the country. Given the fact that China’s total import and export trade is $4 trillion, and that its apparent prosperity vitally depends on commerce with the outside world, this sharp official limitation of foreign cash transfers seems anomalous. In fact, it is just one symptom of China’s vast and convoluted mercantilist economics regime. In this instance, it attempts to bottle-up capital tightly inside its borders while flooding the outside world with $2.2 trillion of exports(2013).
Stated differently, China’s rulers have evolved a form of roach motel economics on its capital account—-every thing comes in, but nothing goes out. Thus, in 2013 China experienced direct investment inflows of about $120 billion and total capital account gains of nearly $500 billion—including portfolio investments, the $200 billion surplus on its trade account and other sources of so-called “hot money”.
Yet what did it do with this half-trillion inflow, most of which was in USDs? Why its central bank scooped it all up, put it in its official foreign exchange vault and issued $500 billion worth of its domestic currency, the RMB, in its place. Consequently, China’s so-called foreign exchange reserves soared yet again—to nearly $4 trillion.
By the light of mercantilist thinking, $4 trillion of foreign exchange reserves may sound like quite a triumph. In fact, however, it is a giant headache for China’s red capitalist rulers because these currency pegging operations—that is, buying up the $500 billion inflow on the capital account during 2013 and emitting $500 billion of new RMB—-fuel runaway credit inflation in its domestic financial system.
Indeed, China’s mercantilist economic policies explain in large part how its total credit market debt outstanding exploded from $1 trillion in 2000 to $25 trillion today, and how its domestic economy was transformed into an out-of-control venue for speculative investment in industry, infrastructure and housing construction unlike anything previously witnessed in human history. Its internal economy has thus become a giant pressure-cooker on the verge of an explosive and calamitous blow-off.
So to tamp down the pressure, it undertook an experiment in controlled outflow of capital. But in a very short period of time, wealthy industrialists, merchants and even party bigwigs took the opportunity to haul huge amounts of cash out of the system and into safer environs abroad. In a word, China’s elite knows that the whole so-called miracle of red capitalism is a massive, unstable house of cards, and has voted so with bags full of greenbacks in hand.
The IMF, the US Treasury and the Keynesian establishment generally are telling the Chinese authorities to “liberalize” their economy and shift rapidly toward open capital markets, an internationalized currency and a domestic consumption driven redirection of its $10 trillion hothouse economy. Yet even this tiny experiment in loosening its vast apparatus of command-and-control produced a thundering domestic political uproar. So the authorities retreated for the moment, but in so doing dramatically telegraphed the economic and political upheavals which lie ahead.
Red capitalism is a disastrous, dead-end experiment in statism that is finally falling victim to its own internal contradictions. And as the economic pressures and instabilities of its hothouse economy build, the Beijing rulers will be forced into ever harsher measures of authoritarian control. Instead of IMF approved experiments in “liberalization”, the imperiled Chinese state will increasingly go on the warpath against “enemies of the people” and the vast corruption that its own policies have bred and natured over the last three decades.
The idea that China can have a “soft-landing” is a pipe dream. It is convenient to Wall Street stock peddlers and Keynesian economic authorities who fail to understand the free market prosperity and aggrandizement of the state are always on a collusion course, and that sooner or later a day of reckoning arrives. China is now approaching that day.
BEIJING—China’s major banks have halted an experimental program, sanctioned by the country’s central bank, that helped citizens transfer large sums overseas despite government capital controls, according to people with knowledge of the matter.
The halt, which the people said was likely to be temporary, comes after the program was criticized by China’s powerful state television broadcaster, underscoring the political sensitivity of the issue of wealthy Chinese moving money abroad. Experts said the criticism could set back China’s efforts to ease its grip on the country’s financial system…..
Last week, China Central Television accused the lender of improperly helping clients skirt China’s controls on cross-border fund transfers. In some cases, CCTV said, the bank worked with immigration agents to help customers disguise the origins of their funds.
Bank of China has denied the accusations. It said in a statement last week that it adhered to regulatory requirements in conducting the business, including those prohibiting money laundering.
CCTV officials didn’t respond to requests for comment.
The controversy comes at a politically sensitive time. China’s top leadership is deepening a nationwide effort to fight corruption, with a focus on officials suspected of trying to move abroad assets they might have gotten through bribes or other illegal means. Earlier this month, Liu Yunshan —a member of the Communist Party’s top decision-making body who is in charge of the country’s propaganda apparatus—called on the government to address the problem of what are known in the country as naked officials, or those whose families have moved overseas.
Analysts and economists have widely acknowledged that China’s closed capital-account system has become more porous and that the rules are routinely circumvented. A 2008 report by the PBOC said that up to 18,000 corrupt officials and employees of state-owned enterprises had fled abroad or gone into hiding since the mid-1990s, and that they were suspected of having taken $123 billion with them. A favored method, according to the PBOC report, involved squirreling cash away with the help of loved ones emigrating abroad.
The CCTV report brought to light a trial program the PBOC launched about two years ago that allowed a few approved banks, including Bank of China, ICBC and China Citic, to start offering cross-border yuan remittance services for Chinese individuals through their branches in the southern province of Guangdong. The PBOC never publicly announced the program because it intended to carry out the trial quietly, the people familiar with the matter said.
“The program itself is neither illegal nor improper as it’s been approved by the central bank, but the question is if any particular bank has gone too far by offering clients services they are not supposed to,” said a senior executive at a big state-owned bank in Beijing. “We all had to put a brake on it before the central bank draws a conclusion from its investigation.”
Guangdong, which borders Hong Kong, was the birthplace for China’s experiment with capitalism. Overhauls implemented there are usually expected to be implemented nationwide.
Chinese citizens usually have had to convert their yuan funds into foreign currency before remitting them overseas. Under the current rules, they aren’t allowed to exchange and move more than $50,000 a year out of the country. The trial program allowed citizens to skirt the restrictions, letting them transfer unlimited amounts of yuan overseas and then convert it into foreign currencies, according to the people.
Officials close to the PBOC said on Monday that it isn’t likely that the central bank will withdraw the trial program altogether, as it is in keeping with Beijing’s broader effort to make it easier for funds to move in and out of the mainland and to promote the yuan’s use overseas. In its latest announcements aimed at gradually freeing up the flow of money, China’s foreign-exchange regulator on Monday issued revised rules that would make it easier for Chinese companies to keep overseas profits and dividends earned in other countries.
Some analysts say the halting of the business amounts to a setback to the government’s reform efforts, at least for now. “This action highlights the tension between the benefits of easing restrictions on capital flows and the risks of allowing freer movement of capital in the absence of effective regulation of financial institutions,” said Eswar Prasad, a China scholar at Cornell University.
Until recently, Bank of China had been offering the yuan-transfer services to its wealthy clients, according to officials with knowledge of the bank’s operations. In its statement last week, the bank said that the services were limited to clients who seek to emigrate through investments—gaining residency rights abroad by putting money into businesses in the host country—or to buy property overseas. It also said that it has in place a procedure that requires the bank to check the sources and purposes of clients’ funds.