Reserve Decline Worse Than 1997 for China

China, is now playing a soul-stirring "capital outflow sniper", which is "China's economic defense."

The last time China faced the threat of significant outflows in the mid-1990s, it did not utilize capital controls, in part because it had much tighter controls to begin with. Now is a different story.

Only in the past two months, we see regulators shoot four times, the goal is clear, cut off the capital outflow through black channels: in October, UnionPay cut off Hong Kong insurance payment channels; November, bitcoin, huge foreign investment projects, Shanghai Free Trade Area strengthen the review of overseas investment channels. Almost all the central bank's big news are related to combat capital outflows.

We then lengthen the timeline, you will find that from the end of last year to stop some of Deutsche Bank's foreign exchange business, to November this year, the RMB exchange rate fluctuations every time, are accompanied by capital outflows warning and regulators war.

Regulators are so battle ready for capital outflows with rarely seen poewr, even in the mid-1990s when China faced a serious capital outflow, that was not the case.

This "capital outflow sniper war" continues, however, it can be said that results are slowing in the last six months: in the first stage, monthly outflows fell about $50 billion, and the last seven months were reduced by about $10 billion.
Why launch a war now? Some numbers to put the situation in context:
However, it is unexpected, accompanied by the overseas investment surge, the speed is almost out of control. Reflected in the foreign exchange reserves, in June 2014 reached its peak and after a sharp turn, two years later it has dropped dropped by $870 billion.

What is the concept of $870 billion? The total resources of the IMF total $660 billion. During the entire Southeast Asian financial crisis, the world's foreign exchange reserves fell $350 billion, and in two years, China's foreign exchange reserves shrunk by more than 20%. Is not difficult to foresee, if left alone, 10 years later the foreign exchange reserves would be dismal.
Reserves have already declined by more than in 1997 on a percentage basis and there hasn't been any crisis yet.

iFeng: 中国正在进行一场“资本外流狙击战”

Chinext Analog


Ni Pengfei: Buying Restrictions to Last Thru 2017

State Council scholar Ni Pengfei says buying restrictions won't end in 2017.

iFeng: 倪鹏飞:楼市调整将持续2017整年 房地产利润要平均化
But we are more worried about is that in the long run market supply is expanding, oversupply is increasing, developer investment confidence is falling, which means relying solely on real estate investments to spur economic growth may be over, is unsustainable .
On the current policies end date:
Reporter: Do you think this round of adjustment cycle will continue to how long?

Ni Pengfei: Following the regular cycle and system cycle, typically a three-year period, an increase of half a year, year and a half of the decline, if other conditions remain unchanged the whole year of 2017 will be a period of adjustment.
Real estate started rebounding in summer 2015 so that fits his timeline of 1.5 years up, followed by 1.5 down.
Why does the money flow into the real estate, the fundamental reason is that the interests are too high. Popular, the industry has a monopoly so the interests are not equal, resulting in high monopoly profits, profit averaging is to break the monopoly to compete. In general, this involves three levels of the problem, namely the land system, financial system, fiscal and taxation system, which support the real estate market and land market monopoly, resulting in large-scale investment speculation.

In fact, to establish a market regulation mechanism to curb investment speculation to create the conditions. For example, taxes, the collection of real estate tax, the formation of certain pressure on speculative investment.

In addition to establishment of a sound mechanism of government regulation, the market is changing, especially in the financial sector, real estate is a financial product, even the relatively robust market mechanism USA also had a housing bubble.

Torschlusspanik Begins: China Implements Capital Controls

Well, there's no point in warning people about a collapse in the Chinese yuan anymore because there's soon to be no way out. Renminbi is turning back into something similar to Disney dollars, which are valid only in the theme park.

SCMP: China’s central bank caps yuan’s outflow to stem currency’s slump
Non-financial companies domiciled in China will be limited to lending the equivalent of 30 per cent of the owners’ equity to an overseas company in yuan, according to a November 26 circular by the People’s Bank of China, a copy of which was obtained by the South China Morning Post. Both the lender and the borrower must share an existing shareholding relationship, the document said.

...On Monday, the Shanghai branch of the State Administration of Foreign Exchange said approval from the authorities was required for applications for cross-border payments exceeding US$5 million meant for overseas investment purposes, according to sources.

The government has also tightened checks on overseas acquisitions and imposed rules to make it more troublesome to bring yuan abroad.
With the new curbs, Beijing is shifting its emphasis from propping up the yuan’s value in the currency markets to blunt controls for taking it offshore.
And there was the restriction on gold imports yesterday. Everyone seems to be focused on how this is a reversal of China's plans to internationalize the renminbi, yet ignores the more obvious explanation: liquid reserves are close to exhausted or are projected to exhaust if the U.S. dollar continues to appreciate.

The news comes on the same day a Hurun report said yuan devaluation fear has 60 percent of HNWIs wanting to buy property overseas: 担心人民币贬值,超6成高净值人群欲海外购房投资
"I think for most Chinese HNWIs, the current global asset allocation is to buy a house and foreign currency deposits, it's that simple,"
The market is priced for perception, not reality. If perception aligns with reality then you have stability. When it deviates, there is mispricing and risk for profit to the up and downside. I don't have a magic insight into market perception and others may have a better read, but my take is that while the renminbi depreciation crowd has bigger megaphone since August 2015, it is still a small minority position. I don't sense that the bulk of investors are properly assessing the risk of a major devaluation of the Chinese currency, even as the evidence for it is piling up at an accelerating pace.

The U.S. dollar remains key. If DXY turns back below 100 and stays there, the odds of an acute crisis fall. If DXY is already on the way to 120, watch out.

Short of an extreme crisis, the yuan is unlikely to be the biggest loser from a yuan devaluation. However, I suspect the yuan is still the largest domino in the market. A big depreciation in the euro or yen could shock the market, but yuan devaluation will spark much greater panic.

Also relevant: Horseman Capital Asks "Is China Running Out Of Money"

Time to Panic: China Limits Gold Imports

China's officials favored gold as an asset for many years and most interpreted it as a long-term strategy. The bolder claim said China was going to back the yuan with gold. There was the argument China wanted to become the global center of the gold trade. More practically, imports of gold count as imports, but are really a form of savings. Importing gold is a great way to satisfy political pressure surrounding a trade imbalance by shifting some savings activity into the current account. The best evidence was the heavy advertising and investment promotion pushed by the government itself, encouraging Chinese to buy gold.

FT: China tightens gold import quotas to curb dollar outflow
China has curbed gold imports in the wake of government attempts to clamp down on capital leaving the country, according to traders and bankers.

Some banks with licences have recently had difficulty obtaining approval to import gold, they said — a move tied to China’s attempts to stop a weakening renminbi by tightening outflows of dollars, the banks added.

...Quotas for importing gold have been cut during quarterly assessments this year. Banks also have dollar quotas, some of which must be used when buying gold.
Now is the time to panic if you're a Chinese with lots of money tied up in yuan because the Chinese government is signaling two things with this move. One, all exits will be shut. If you don't escape now, you run the risk of paying a high price to get out because gold premiums will start rising if demand outstrips supply. Two, it signals the yuan is in serious trouble. Gold imported by the banks sits in bank vaults and is effectively a national resource because the government controls the banks. If China decides it wants your gold or your dollars, it can force you to sell.

This reminds me of 2013 post from Liu Junluo: Gold going to $500; Chinese yuan will collapse; China will nationalize dollar deposits

If you adjust the timing of his call, just about everything he warns of (except for the massive drop in gold) has taken place by 2016:
From 2010 onwards, when the Dollar Index was 74, China's central bank made the strategic decision that the dollar would devalue over the long-term. Therefore, China's central bank began selling dollars and buying the euro, the yen and commodity currencies to diversify China's foreign exchange reserves.

However, beginning in 2013 , China's central bank suddenly found the U.S. economy has been gradually recovering. The euro zone economy has continued into a disastrous predicament. Meanwhile, the Bank of Japan launched a policy of devaluation of the yen.

Between July and October, the Chinese central bank will manufacture China's disastrous stock market crash. The hidden past strategic errors of judgment will now come to light, exposing China's bad debts.

From 2010 onwards, China's central bank took 3 trillion in foreign reserves and converted 2 trillion into non-US currencies, this is the root of the future Chinese economic disaster. roots. In all of human history, there is no central bank that committed such a stupid, catastrophic mistake.

The real farce is that China's central bank in the coming months will reverse its past dumping of dollars; it will turn into a frenzy of dollar buying. Including a rapid nationalization of domestic U.S. dollar savings.
The stock market crash came 2 years later, after a massive bubble formed, but the long-term strategic error of diversifying away from the dollar, particularly into highly volatile and inversely correlated assets such as commodities, was ongoing for years.

China sold dollars in a rising market and long-term, it may even come out ahead. But China also sold dollars amid a depression, a period of dollar deflation. Now is the final stage: is the depression set to end, or does the U.S. dollar have another 20 percent to go before it tops? If the latter, the move to limit gold imports tells us China is unprepared.


Chinese Developers Spend $100 Billion on Ocean City

Remember when everyone was worried about Japan taking over the United States?

Bloomberg: $100 Billion Chinese-Made City Near Singapore 'Scares the Hell Out of Everybody'
The Chinese companies have come to Malaysia as growth in many of their home cities is slowing, forcing some of the world’s biggest builders to look abroad to keep erecting the giant residential complexes that sprouted across China during the boom years. They found a prime spot in this special economic zone, three times the size of Singapore, on the southern tip of the Asian mainland.

...The scale of the projects is dizzying. Country Garden’s Forest City, on four artificial islands, will house 700,000 people on an area four times the size of New York’s Central Park. It will have office towers, parks, hotels, shopping malls and an international school, all draped with greenery. Construction began in February and about 8,000 apartments have been sold, the company said.

...“The Chinese are attracted by lower prices and the proximity to Singapore,” said Alice Tan, Singapore-based head of consultancy and research at real-estate brokers Knight Frank LLP. “It remains to be seen if the upcoming supply of homes can be absorbed in the next five years.”

Game Over for the Wealthy: China Tightens Capital Controls

SCMP: China’s foreign investment ‘shopping spree’ over as Beijing moves to slash capital outflow
Tighter control of outbound investment is likely to put an end to a trophy asset shopping spree by well-connected companies such as Anbang Insurance and Dalian Wanda, with Beijing is ready to cut the supply of foreign exchange for such deals.

Shanghai’s municipal foreign exchange authority had told bank managers in the city that all overseas payments under the capital account bigger than US$5 million would have to be submitted to Beijing for special clearance before proceeding, the sources said.

...While the move did not necessarily mean all such deals would be vetoed, the regulatory procedures that would have to be navigated before completing them would take much longer, the sources said.
Capital outflows will increase if this is true, because anyone with legitimate reasons for moving money abroad has to know their window is closing. The next step, when the collapse begins, will be a total ban on outflows.


Tianjin and Shanghai Tighten Real Estate Controls

Reuters: China's Tianjin city steps up curbs to tighten mortgage lending
China's major port city of Tianjin on Monday announced stricter tightening measures to rein in a red-hot property market, by hiking the downpayment ratio for buyers of first and second homes.

The ratio has increased to 30 percent for first-home buyers borrowing from banks, versus 20 percent earlier, the central bank branch in Tianjin, near Beijing, the Chinese capital, said in a statement.

A higher downpayment, of 40 percent, is required from those with unpaid mortgages who plan to buy a second home, it added.
iFeng: 沪津楼市调控再加码:首付均提高 认房又认贷
Yesterday (November 28) evening, the Shanghai Municipal Construction Committee announced Mortgage policy: Since November 29, 2016, households buy the first home apply for commercial loans, the down payment cannot be less than 35%. If the buyer already owns a house in Shanghai, or doesn't not own a house in Shanghai, but has record of a applying for a mortgage, the down payment cannot be less than 50%; for the purchase of non-ordinary housing, the down payment cannot be less than 70%.