News ID: 187822
Published: 0310 GMT February 17, 2017

China's economy doesn't look so wonderful when you look at the really big numbers

China's economy doesn't look so wonderful when you look at the really big numbers

The supposed stability being portrayed in China's recent economic reports doesn't look so rosy in the scope of the big picture.

For example, less money appears to be fleeing the country than only a month or two ago — but looking back 12 months, the trend is still worrying, according to CNBC.

China bought US government bonds in December for the first time since May, the Treasury reported. However, overall holdings fell by a record $188 billion last year, according to news service StreetAccount.

Similarly, official foreign exchange reserves fell at a slower pace in January, but they have dipped below the psychologically important $3 trillion level. That marks a $1 trillion drop in just two-and-a-half years.

"The faster we get to $2.5 trillion in total reserves, the quicker the sense of eventual disarray will be," Junheng Li, founder of China-focused equity research firm JL Warren Capital, said in an email. She estimates that about $65 billion to $70 billion leaves the country every month, including more than $80 billion in January alone.

"Additional tightening of capital controls is likely," Li said. "However, we are starting to see restrictions imposed on areas with increasing marginal cost. Therefore, one needs to wonder if they will be able to slow down much further the pace of outflows."

Beijing tightened restrictions on individuals taking money out of the country in the last several months. From a purely financial perspective, Chinese also have seem to be showing less urgency to buy assets denominated in US dollars since the yuan pulled out of the seven percent dive it made last year, gaining 1 percent so far in 2017.

But the yuan could come under pressure again. The US dollar will likely stay strong or move higher, since the US Federal Reserve looks on track to raise interest rates at least twice this year. Higher interest rates typically push currencies higher.

"As long as the US is in a tightening environment, we'll likely see capital outflows" from China, said Francis Cheung, head of China-Hong Kong strategy at CLSA, a brokerage and investment firm based in Hong Kong.

 

Capital trapped in China

 

Money sloshing around inside China's closed markets creates investment bubbles — the country has seen everything from real estate to stocks to bonds to soybeans swell in price, and then pop. When those bubbles burst, authorities rush to patch up the situation, putting US investors on edge.

The problem with China is "every single asset class has been inflated" or 'deflated', Cheung said. "It's a fundamental issue."

A 40 percent plunge in the Shanghai composite in 2015 and a failed attempt to implement circuit breakers half a year later contributed to market shocks that reverberated globally. When Beijing limited investors' ability to borrow and invest in stocks, Chinese turned to speculating on Chinese commodities exchanges, which then drove prices for global assets such as iron ore.

   
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