There is still a perception – though it is perhaps less widespread than it used to be – that Chinese savers are desperate to get their money out of China, if given half a chance. That perception shows up in various guises, whether in the argument that “we don’t really know what would happen to China’s exchange rate if China liberalized its capital account and let the exchange rate float” or in the argument that “China’s government is building up foreign exchange on behalf of its citizens.”
Best I can tell the evidence supporting this line of argumentation is pretty thin. Last I checked, Chinese household dollar deposits were falling relative to RMB deposits. And China’s savers didn’t exactly jump at the chance to buy foreign bonds through the qualified domestic institutional investor program. Bloomberg reports:
“At the end of November, Chinese banks sold less than 3 % of their quota for QDII funds, which are limited to investments in bonds, money-market products and fixed-income derivatives.”
Those meager outflows hardly helped reduce pressure on the central bank. The PboC isn’t all that much more keen on US and European bonds than Chinese savers. It would prefer to scale back the pace of its reserve growth. That is one reason why China’s government agreed to allow QDII investment in equities, not just bonds.
Now it is true – at Lex notes -- that the real yield on deposits in China’s banks is pretty meager – real interest rates on deposits are currently negative. But that doesn’t necessarily make dollar or euro deposits or bonds more attractive. I agree with Stephen Jen here. He writes in his most recent note:
There is little interest among Chinese investors in investing in overseas fixed income instruments − partly because of the 15% monthly return on Chinese equities and 15% annual return on properties, but partly because of cultural reasons (Chinese investors prefer stocks, not bonds )
Trading under-valued RMB for over-valued euros and dollars is risky. Dollar and euro interest rates aren’t that much higher than RMB interest rates, and even a relatively slow pace of RMB appreciation can easily wipe out any net gain. Luo Jun and Zhao Yidi of Bloomberg:
“U.S. 10-year government bonds are yielding 4.62 percent a year, while the yuan has appreciated 4.3 percent against the dollar in the past twelve months.”
Real rates on RMB deposits are now negative. But the real return – in RMB – on euros and dollars is even worse.
Foreign equities may offer a slightly better bet, but I wouldn’t bank on huge outflows. At least not right now. Though I can certainly see why any Chinese investor sitting on large capital gains from the recent surge in Chinese share prices might want to take some profits and diversify into equity markets with a slightly lower P/E ratio.
All Asian economies right now – more or less – are trying to reduce pressure on their currencies to appreciate by liberalizing controls on capital outflows while tightening controls on inflows.
China’s government, for example, recently made it harder for domestic residents to convert dollars to RMB (and in practice has made it easy to turn RMB into dollars). Korea’s government is trying to make it harder for Korean banks to borrow in yen to buy won. Thailand has worked very hard to discourage inflows in bath debt. I could go on.
Personally, I doubt that this approach will work. Not in the sense of generating sufficient private outflows to reduce pressure for currency appreciation.
Especially not in China.
The scale of the pressure on China’s balance of payments is just too large. China’s current account surplus is likely to top $300b by a considerable margin. Stephen Green’s $400b estimate strikes me as about right. Expect another $50b -- if not more -- from net FDI inflows.
And even if China can keep foreigners – like me – who want to bet on RMB appreciation out, I doubt that $450b in Chinese savings wants to leave China. At least not right now.
Not when Chinese markets are booming.
Not when money is generally flowing into emerging economies – not out of emerging economies – and almost all emerging economies are facing pressure for appreciation.
Not when a lot of oil money is perhaps looking to move into Asia, putting pressure on Asian currencies to appreciate. More on that latter.