Several months ago I speculated in one of my postings that one likely consequence of the effort to tighten caps on loan growth is that banks will be more eager to bundle, securitize and sell loans as a way of creating more room under their loan growth caps to expand their lending to important clients.Typically bankers resist selling loans, even though it makes great economic sense for the bank to eliminate the risk and retain a spread, because their importance tends to be based on total revenues associated with their loan books or total assets under management, and loan sales immediately reduce both.I remember from personal experience that in the 1980s American banks faced this problem – management wanted to make their loan books more liquid but the officers responsible for the individual loan books rarely cooperated with the process.
If loan caps are serious, however, it eliminates a lot of the resistance because loan officers need to keep their clients happy and loan sales immediately open up space to book new loans.To the extent that this happens, of course, it will undermine the effectiveness of loan caps on preventing overinvestment, but on the other hand even if the market for loan securitizations develops quickly, as I think it will, it is still currently small enough that its effect won’t be too great.
Yesterday Bloomberg had this article, describing exactly the type of transaction I meant. The article mentions a total of only around $10 billion completed and pending deal.
ICBC to Raise $1.1 Billion Selling Asset-Backed Securities
By Luo Jun
March 21 (Bloomberg) -- Industrial & Commercial Bank of China, the world's biggest bank by market value, plans to raise 8 billion yuan ($1.1 billion) selling asset-backed bonds by pooling loans it made to Chinese companies. The bonds, divided in three portions with different ratings, will be sold to members of the nation's interbank market on March 27 and 28, the Beijing-based bank said in a statement yesterday. ICBC sold its first asset-backed securities last October, raising 4.02 billion yuan. As much as 60 billion yuan of asset- backed transactions were pending regulatory approval in China at that time, according to an estimate by HSBC Holdings Plc, which advised on the deal.
The sale followed similar offerings by Shanghai Pudong Development Bank Co., China Development Bank and China Construction Bank Corp. Bank of China Ltd., the country's third largest, plans to sell mortgage-backed securities this year to make way for new loans as regulators limit growth in lending, Chairman Xiao Gang said.
China’s regulators have told banks to hold growth in new loans at the same pace as last year to help tame the nation's 11- year-high inflation. Banks must meet annual and quarterly growth targets to avoid penalties. Securitization can take loans off a bank's balance sheet, leaving more room for new advances, according to Xiao.
Given high liquidity in the system, low interest rates, and nervousness about the stock and real estate markets, my guess is that it will not be terribly hard to sell these securitizations after perhaps an initial period during which buyers test the market.Any of my students interested in investment banking careers might want to try to understand how these deals work.I think this is going to be a growing market in China over the next few years.
Today’s China Daily quotes remarks made by a senior advisor to the PBoC on RMB stability and the need to fight hot money inflows, which he delivered at a conference held over the weekend (“Advisor: China needs stable yuan to fight hot money”). I thought his comments were very interesting:
China needs a relatively stable exchange rate and should not use another one-off currency revaluation to curb inflow of overseas speculative capital, Fan Gang, an adviser to the central bank, said in remarks published on Monday.“In order to reduce the inflow of speculative money and prevent speculation on a bigger magnitude, China is in greater need of a relatively stable exchange rate policy,” Fan was quoted as telling a weekend forum in Beijing.
Fan opposes the use of another one-off revaluation of the Chinese currency, or yuan, according to the Shanghai Securities News. Widespread expectations that the yuan would register further sharp gains against the dollar have been encouraging inflows of speculative money into the country.
Aside from the fact the financial authorities and their advisors continue warning about hot money inflows, I was intrigued by the fact that Fan had clearly been thinking about a one-off revaluation and was, at least in public, opposed to it.Of course his public “opposition” might simply be caused by concern that any widespread belief that the government might engineer another one-off revaluation would spur further inflows – the article points out that he himself argues that expectations of a sharp RMB appreciation have been encouraging inflows of speculative money.
The skeptic in me wonders however if the problem for Fan is a one-off revaluation, or just widespread expectations of a one-off revaluation. In the latter case, we would expect the authorities to deny that a one-off revaluation is coming, whether or not they thought it was.I remember Lopez-Portillo’s widely repeated claim in 1982 that “We will defend the peso like a dog”, which earned the Mexican president opprobrium (and, funnily enough, barking sounds whenever he subsequently appeared in public), when the currency was catastrophically devalued just weeks later, and of course in July 1997 the president of Thailand promised to defend the baht only days before it was devalued.Watch what they do, in other words, not what they say.
What interested me most about his speech is that by now it seems that the option of a one-off revaluation is clearly one of the policies on the table, and it is being widely discussed, even if distastefully.About a year ago when I first suggested that the government was moving, almost inexorably, in the direction of a maxi-revaluation, I pointed out that although at the time the prediction might seem unthinkable, even laughably wrong, I expected the consensus to shift fairly quickly– I said that within six months I expected the idea would be much more generally discussed, and probably within a year it would be one of the central policy options under discussion.The direction and force of China’s monetary problems seemed to rule out most other solutions.
I still do not believe that the policy of a sizable and sudden one-off revaluation is a widely-supported option, but things certainly still seem to be moving in that direction. I expect that if hot money inflows prove to be a persisting problem over the next month or two, or if inflation stays high in March and April and especially if inflation shifts away from food and towards other goods and services, both of which I expect, it is going to be increasingly hard to dismiss the idea of a more radical and efficient solution to China’s monetary problems.
Talking about hot money, this is what China Daily reports about Fan Gang’s take:
More overseas speculative capital is expected to flow into China in 2008 and next year as a result of the US subprime mortgage crisis, which has sharply driven down the US interest rates and the value of the dollar, Fan was cited as saying.
The credit crisis would drive more capital to high-growth countries such as China and India, he said, adding that it remained a key challenge and priority for China to resolve the problem of excessive liquidity in its banking system.
Excess liquidity really is a challenge, but I am not sure they are dealing with it to any serious extent.The problem lies with net currency inflows, and the only way to address that is to address the currency regime.Still, for all the hot money and persisting inflation, the authorities are talking bravely about their ability to control monetary conditions.Over the weekend Vice-Premier Li Keqiang, China’s new financial tsar, spoke about economic stability and financial management.According to the South China Morning Post:
The central government has the confidence and ability to take effective austerity measures to avoid wild swings in economic development, Vice-Premier Li Keqiang said yesterday, in his first public speech in the new post. “Under the circumstances of a complex world economy, China's fast and stable economic development is particularly important," he said at a forum held in B over the weekend.
Mr Li, who is tipped to succeed Premier Wen Jiabao when he retires in 2013, said the government would keep macroeconomic controls at a reasonable level in accordance with “new situations and new problems”.
It seems to me that we are still in an area of policy complexity and even confusion.The government wants to constrain overheating and inflation, and they are also hoping to maintain economic stability (i.e. stable employment growth), but it is not clear that these two policy goals are compatible. The former needs more rapid currency appreciation and a sharp contraction in credit conditions, while the latter would be adversely affected by those policies.
I interpret “new situations and new problems” to mean that they will maintain “flexibility” in their fight against inflation, or to put it in a much less ambiguous way, unemployment trumps inflation as a problem.I was not the only one to see the official comments that way.According to the same article, “Ha Jiming, chief economist of China International Capital Corp, said the comments showed Beijing's determination to maintain economic stability.”
In the past several months, we heard a lot about tackling inflation, but now the top leaders are saying to find an appropriate balance between curbing inflation and economic development,” Mr Ha said.
An “appropriate balance” is a little hard to define, but the anecdotal evidence suggests to me that unemployment is the key factor.But even if it weren’t, I see no evidence that they have the tools really to constrain monetary growth.By the way Gene Ma of ISI-CEBM sent me a research report today that has some very interesting numbers.I don’t want to suggest that the folks at ISI-CEBM are as pessimistic as I am about monetary policy, but according to them, the PBoC was able to mop up 77% of foreign currency inflows in 2006 by net new selling of sterilization bonds and hiking minimum reserve requirements.
In 2007, although net reserve increases jumped from $247 billion to $463 billion, the total amount of net new sterilization bonds and minimum reserve hikes took out only 72% of foreign currency inflows.I am not a big believer in the effectiveness of either measure in constraining underlying liquidity growth, but even if I were, it seems to me that in the face of much larger inflows they have become less, not more, effective.The “un-mopped” portion of inflows was 2.3 times as high in 2007 as in 2006, which would be a bad thing even if like me you didn’t think the mopping up was very effective in the first place.
Meanwhile there is a new problem in the fight against inflation.Last week I discussed reports of fuel shortages in China.Here is what the South China Morning Post had to say today (“Beijing under pressure as fuel shortage spreads”):
Fuel shortages at petrol pumps have spread from southern China to key economic centres in eastern and western parts of the country, pushing Beijing into a quandary as it faces mounting pressure to raise retail petrol prices amid its biggest battle against inflation in a decade. The shortages came as state leaders including Premier Wen Jiabao reiterated that Beijing would not waver from its goal of wrestling down inflation, which surged to a 12-year high of 8.7 per cent last month, even as Mr Wen conceded that it would be hard to reach the 4.8 per cent target for this year.
In a report on Saturday, the Huaxia Times speculated that Beijing would raise state-stipulated retail fuel prices as soon as early next month, without citing a source, although some industry executives doubted it given the high level of inflation. In the past 21 months, Beijing has raised retail fuel prices once, on November 1, by 9 to 10 per cent.
As I understand it, domestic fuel prices need to be raised by about 25-30% for local refiners to break even.According to the South China Morning Post article, Jiang Jiemin, CEO of PetroChina, China’s second largest refiner, “last week said its refining division could break even only at a crude oil price of about US$67 a barrel at prevailing domestic fuel prices.”That is still well below the $100 or so price per barrel in international markets.
Because the authorities are so concerned about inflation, the decision to raise fuel prices is a difficult one.This is because they worry that a fuel hike will, by causing a variety of prices to rise, feed into inflationary expectations and so help inflation to spread away from food and into other goods and services.
But I don’t think this is what will happen.If inflation is indeed a monetary problem, which I think it is in China, keeping fuel prices low will not help to combat inflation.It will simply encourage the spread of inflation into other goods by transferring inflationary pressures away from fuel and into other goods.
This is just the flip side of what has happened already – the recent food supply constraint caused by disease and bad weather, by forcing up food prices very quickly, has absorbed overall inflationary pressures and kept them from spreading into other goods and services as quickly as they might otherwise have done.That is why non-food inflation has been low (and rising).
Too much money causes the average price level to rise.When the prices of some goods rise very quickly because of specific supply constraints, as food did in China, the process actually puts downward pressure on prices for other goods and services since it causes consumers to divert spending from other goods and services into food.However if prices of some goods like fuel are kept artificially low, rather than reduce inflation by lowering inflationary expectations, the policy simply transfers the inflationary pressure to other goods by diverting money spent away from fuel and to other goods and services.
It all depends crucially, I guess, on whether Chinese inflation is a monetary problem or a one-off food problem – money or pork – and what the role of inflationary expectations is in the process.This is a case where the wrong explanatory model can lead to very adverse consequences.
This has been a very long entry, but before closing I did want to add one last think.Geoff Dyer has an interesting article in today’s Financial Times about a recent McKinsey Global Institute report, which I have not yet read, which predicts that within two decades 40% of urban dwellers in China will be migrants from rural areas.Geoff summarizes like this:
On top of the existing 103m urban migrants, Chinese cities will face an influx of another 243m migrants by 2025, taking the urban population up to nearly 1 bn people.In the medium and large cities, about half the population will be migrants, which is almost three times the current level.
These are extraordinary and very interesting numbers.The challenges faced by Chinese cities in the next two decades are going to be huge.One can almost predict that the success of China’s modernization will, to a large extent, depend on the success with which migrant workers are absorbed by Chinese cities.
Like most people I have been looking at CPI inflation in China as a year-on-year number, which is the headline number most widely discussed and reproduced.The problem with this particular number, of course, is that it eliminates the sharp monthly fluctuations and smoothes out the data to such an extent that it is a little tough to figure out what is really going on.
Unfortunately it is not an easy matter to correct for this.As far as I know, the National Bureau of Statistics of China does not reproduce the actual CPI index when they release data.What it does every month is to give us the year-on-year change in the index, as well as the month-on-month change.These numbers are rounded to the nearest 0.1%.
In order to try to get a better understanding of the numbers I asked my assistant Shang Ning to retrieve all the year-on-year and month-on-month numbers for the past two years so that I could construct an index that closely mirrored the NBSC index.Because of their rounding of the data before releasing CPI figures, it required a little bootstrapping to do so, but I finally came up with a series that seems to approximate the NBSC numbers quite closely.
I list in the first two columns below, after the date, the month-on-month and year-on-year numbers released by the NBSC.In addition I annualize the monthly figure, so that we can compare it with the year-on-year figure and see what the real monthly level of inflation is.
Period
Month-on-month inflation
Year-on-year inflation
Monthly inflation annualized
March 06
-0.9%
0.8%
-10.3%
April 06
0.2%
1.2%
2.4%
May 06
-0.1%
1.4%
-1.2%
June 06
-0.5%
1.5%
-5.8%
July 06
-0.3%
1.0%
-3.5%
August 06
0.3%
1.3%
3.7%
September 06
0.5%
1.5%
6.2%
October 06
0.1%
1.4%
1.2%
November 06
0.3%
1.9%
3.7%
December 06
1.4%
2.8%
18.2%
January 07
0.7%
2.2%
8.7%
February 07
1.0%
2.7%
12.5%
March 07
-0.3%
3.3%
-3.8%
April 07
-0.1%
3.0%
-1.1%
May 07
0.3%
3.4%
3.5%
June 07
0.4%
4.4%
5.5%
July 07
0.9%
5.6%
10.7%
August 07
1.2%
6.5%
14.8%
September 07
0.3%
6.2%
3.1%
October 07
0.4%
6.5%
4.3%
November 07
0.7%
6.9%
8.3%
December 07
1.0%
6.5%
13.0%
January 08
1.3%
7.1%
16.3%
February 08
2.5%
8.7%
34.6%
Look at the last row.This gives a better idea than do the headline annual figures of how variable inflation has been and how it has accelerated.The first thing to note is that inflation really began to pick up at the end of 2006, but only began showing up in the annual numbers in the summer of 2007.A quick calculation (which is not included in the graph) indicates that from May 2007 to now China has suffered from double-digit inflation (11.1% annualized).The same calculation also suggests that if the next three months show price increases that on average equal the price increases of the past eight months (around 1% month-on-month) we will have double digit year-on-year inflation in China by May.
The second thing is that the February rate of increase in the CPI was very high (35% on an annualized basis), more than twice as high as the already-high January rate of increase.Because of the big jump in February prices, the numbers for March are likely to be distorted.In fact prices could decline significantly in March (by 1.8% on average) while still maintaining a continuation of January’s 7.1% year-on year CPI inflation.If prices do not decline this month, March 2007 year-on-year CPI inflation will reach 9.1% or more.
I have no idea yet what is likely to have happened to March prices.I understand that some food prices are down from their March highs but other prices have increased.Meanwhile it seems that in today’s newspapers, articles about fuel shortages in China are as plentiful as diesel is short.There have been so much noise and so many rumors about the need to raise fuel prices that hoarding is apparently becoming a problem once again, and the energy authorities have announced many times recently that there is plenty of oil and no need to hoard.Since this is what they said before the last fuel crisis, in September and October, I suspect that their attempts to soothe the market are not likely to be terribly effective, although in good bureaucratic fashion they are also calling for the police to punish “those who spread rumors or hoard oil.”Here is what today’s China Daily says:
China's major oil suppliers denied rumors about oil price rises, and blamed the rumors for the worsening fuel supply shortfall that is spreading northward across the country.High international oil prices have fuelled price rise prospects in domestic market. Some producers and dealers started to hoard oil amid the rumors, worsening the situation, China National Petroleum Corporation (CNPC) and China Petroleum and Chemical Corporation (Sinopec) jointly announced.
The shortage, first reported in southern China, now appears to be spreading to the northern parts of the country.Shanghai, the country's economic center, is now being affected, with rationing, long queues and power-off filling machines becoming common at filling stations.
The Shanghai Economic Commission said on its website that the city has enough diesel to last more than 10 days.CNPC and Sinopec emphasized that China had enough oil to ensure a stable supply and the fuel-supply crises of the second half of last year would not re-emerge.
I suspect that it will be politically difficult to let oil prices rise in March, especially because of its perceived impact on inflationary expectations, but if fuel shortages don’t abate quickly the authorities may have to raise fuel prices soon anyway.My guess is that overall March prices will be down, but if they are down by 1% or less (for year-on-year inflation of 8.0% or more) the very high inflation momentum of January will have continued through the first quarter.
Scattered throughout this blog are references about the way I view China’s currency regime, why I believe monetary policy is out of control, why I have insisted since 2003 that China’s trade surplus and foreign exchange reserves could only grow, and why I claim that the authorities are increasingly going to have to consider a maxi-revaluation as the only solution to a worsening problem.I have been asked several times to summarize this argument.Here is a very brief summary (with apologies to readers of this blog who are tired of all my repetition):
1.Since at least 2002-2003 China has been caught in a monetary trap.By tying the value of the RMB to the dollar, and especially by setting it too low, the Chinese authorities ran the risk that in a time of excess global liquidity they would find themselves in the position of excess money inflows leading to excess domestic money expansion, which would be reinforced as domestic money expansion funded rising industrial production, which would cause an increase in the trade surplus and so increase money flows further.Since global conditions at the time already suggested excess global liquidity, this risk was pretty high.This is why I argued as far back as 2003-2004 that China’s then-high trade surplus could only rise, and as it rose it would necessarily feed domestic money expansion (the PBoC must create the local money with which to buy all those dollars), which would fund more investment, greater industrial production, and a rising trade surplus.The key figure to watch is growth in foreign currency reserves.
2.Because of the self-reinforcing nature of this system, this process must necessarily go on until a very sharp adjustment stops it.The adjustment could come in the form, as it has in the past to China and other countries, of sharply rising domestic investment (“good” version: massive infrastructure spending; “bad” version: forced corporate investment via rising inventories), rapid debt deflation, a collapse of the banking system into bad debts, a breakdown of sovereign external or domestic credit (from excess fiscal expansion), or out-of-control inflation (which is, of course, one way that the currency can adjust), or it could come as a combination of these factors.It is possible but unlikely that the adjustment will be benign, and the longer we wait the less likely it is. This last statement is hard to prove but seems reasonable largely because of historical precedents.
3.They key to stopping or slowing the process is to stop money inflows into China.Capital controls erode over time, and after so many decades of capital controls their use is pretty limited in China, especially given the existence of China- or offshore-based transnational family business networks, and China’s size and long borders.This means the only useful way to address capital inflows is to adjust the currency.
4.Unfortunately even adjustment is problematic. A slow adjustment , which we saw from July 2005 to roughly July 2007, means many more years of domestic monetary imbalances, which runs the risk of causing the adjustment, when it finally comes, to be all the more chaotic.
5.A rapid adjustment, which we have seen since last summer, will only encourage hot money inflows, which will cause the domestic monetary problem to accelerate before it is fixed.In addition, it is highly likely that a rapid appreciation of the RMB will overshoot whatever the “correct” exchange rate might be.
6.That leaves only one option: a one-off maxi-revaluation that causes hot money inflows to subside or even reverse.This may have an adverse impact on China’s trade account, but for reasons I have discussed often I think this impact is less than what many think it will be, and anyway it will happen one way or the other. Nonetheless with Chinese exports having risen, and still rising, so strongly even with the RMB appreciation of the past three years, it seems to me that we would need to see a huge, adverse impact on exports before it slowed export growth to zero, and much of this slowing growth would be absorbed by rising domestic consumption.
7.The main argument in favor of a maxi-revaluation, however, is not that it will be painless.The main argument is that the alternatives are much more painful.
8.How much revaluation?I leave it to smarter economists to argue about what a “reasonable” or “appropriate” exchange rate is.My approach is much simpler.As a former emerging-market bond trader and someone who has spent much of his career watching hot money, investment flows, and investor sentiment, I have tried to estimate what I believe to be the smallest possible revaluation that is nonetheless credible and likely to cause investors, especially speculative investors, to reconsider the direction of the RMB trade.This wholly unscientific approach suggests to me that we will need a 15-20% revaluation of the RMB.Notice that this means that even though between inflation and nominal appreciation the RMB has already risen substantially since I first proposed this over one year ago, I still haven’t changed my estimate.It also means that s smaller revaluation will be a very poor policy choice.
This whole argument in favor of a maxi-revaluation depends crucially on the assumption that foreign exchange inflows will continue to accumulate at extraordinary levels until the adjustment is made. This is the bet I made four years ago – I argued that reserves would surge. Of course like everyone else I seriously underestimated just how much it would surge.The key argument against continued rapid appreciation is of course the incentive this creates for speculative inflows.
I have already argued many times that I believe speculative inflows are a serious problem. Logan Wright, of Stone & McCarthy, has probably done the best work in trying to understand what is happening with foreign currency flows in China.He has a new two-part paper that examines this.I strongly urge anyone interested to read his papers (and get on his mailing list), but to summarize his newest paper, I will quote the opening paragraph:
Our analysis indicates that hot money inflows, which we estimate at $81-147 billion in 2007, were less volatile than the data initially indicated throughout last year and have likely increased in recent months, driven by faster appreciation of the yuan against the dollar. The implications of these findings are that current trends in foreign exchange reserve growth and foreign currency lending growth are likely to continue, even if the central bank enacts new restrictions on short-term foreign debt. In addition, some evidence points to the central bank continuing to use the daily central parity as a policy tool, rather than a channel permitting greater market influence over the yuan's value.
About five and six months ago there was a small controversy on my blog and on Brad Setser’s blog about the QDII process, which permits Chinese investors to invest abroad through regulated entities called QDII.The argument was about whether QDII would be successful in helping reduce China’s net capital inflows by sparking investment outflows from Chinese savers who wanted to diversity their portfolios and buy foreign assets.
The responses to the first QDII offerings were euphoric, and the offerings were vastly oversubscribed almost immediately, and supporters of the argument that QDII would help relieve monetary pressures pointed to the QDII projections of $90 billion in new offerings in 2008 as representing a significant outflow – equal to about 20% of the net expected inflow for the year.Some of them also argued that because of the sizable H-share discount to the Shanghai markets, Chinese investors in H-shares were assured of returns high enough to overcome the headwind of RMB appreciation.
Opponents, which included both Brad and me, argued that a rising RMB meant that it would be almost impossible to beat the Chinese bank deposit rate – expected at that time to be about 10-14% in US dollar terms – without taking huge risks, and that after the initial euphoria there would be very little interest in QDII.We assumed that QDII investing would die out pretty quickly.Here is what I wrote in my November 30 entry:
If QDIIs are conservatively managed they are most likely going to underperform local investment alternatives.In that case instead of more money pouring into QDIIs next year I wonder if we won’t see disgruntled investors begin to withdraw their investments as their returns significantly underperform simple bank deposits.We may see net redemptions next year, rather than more money going into QDIIs.
On the other hand If QDII managers feel compelled to beat the currency-related hurdle to keep their investors, there is the danger that they stretch a little too far for yield and take some ugly risks.If as a manager you expect prudent investing will lead to redemptions, does that create an incentive to go out too far on a limb?I think it might, at least in some cases, and I don’t doubt there will be some dodgy ideas peddled to fund managers.However a nasty performance for one of these QDIIs could sour the whole market, at least in the short term.
It is hard to see why investors should be taking money out of the country much longer when the best game in the world seems to be to bring money into China, especially as the pressure for RMB appreciation increases.If QDII investors do reverse their earlier decision, the monetary benefits of the QDII program could actually reverse next year as investors bring their money back home, and with reserves expected to grow anyway by another huge amount, this reversal will only make matters worse.
In January the numbers came out for the various QDIIs and, not surprisingly, they were pretty bleak.Some of them had indeed taken some big risks – when you have to beat a hurdle of 10-14% hurdle, your only option is to gamble wildly, something that I suspect many investors in QDII did not realize – and the bets turned out badly more often than not.For those who are interested, in my January 16 posting I discuss a Credit Suisse report that QDIIs had lost an average of 12% since launch.
Since January it seems that things may have gotten much worse.In today’s South China Morning Post I read the following:
An overseas equity-based fund operated by China Minsheng Banking Corp has been forced to liquidate after its value fell more than 50 per cent, giving mainland investors a hard lesson in the risks of overseas markets. Among the qualified domestic institutional investor funds that have made information public, Minsheng Bank's was the first to be dissolved.
The liquidation, which Minsheng confirmed yesterday, could be followed by similar moves by other fund managers, since mainland QDII products had suffered amid turbulent global stock markets, analysts said.
If I remember correctly there was about $20-30 billion of QDII money raised last year. If we assume that every QDII fund loses half of the value of the assets under management, and then liquidates, that represents $10-15 billion of new inflows into China. Since liquidations may take place at less than 50% loss, the inflows will probably be slightly greater.
Normally $10-15 billion would be considered a large number, but we’ve been so knocked-about by large numbers recently that it seems like a piddling amount – about 2-3% of total expected 2008 net inflows. I suppose the only good aspect about this whole thing is that having domestic investors lose money in foreign investments does reduce net capital inflows into China, even after the outflows are repatriated. Those investors who got screwed can at least sleep well knowing they have done their patriotic duty and helped the PBoC.
A while back on one of my earlier postings I wondered whether one of the first acts of Wang Qishan, the country’s new economic czar, might be the try to reduce capital inflows by more rigorously enforcing capital controls.I really didn’t think this kind of administrative response to a monetary problem would be likely to work for more than a few weeks, but this kind of strategy does seem to mesh with the bureaucratic instincts typical of government officials.
I have no idea if this is in fact part of his plan of attack, but clearly someone out there is worried about illegal capital inflows.In the “Comment
over the weekend.