Following in the tracks of a highly regarded investment manager, many Chinese investors have begun to reduce their exposure to China’s economy and shift their wealth overseas.
James Chanos predicted in a recent interview with Opalesque TV, a news service for the hedge fund industry, that China’s economy will meet with disaster because bad debts throughout the economy, and especially in the real-estate sector, are set to unwind. China has witnessed “bad credit and credit extension that makes Greece and Spain and the U.S. look like child’s play,” he said.
Chanos manages the Kynikos Associates (Greek for cynic) hedge fund, which specializes in finding overvalued investments and making money when the value of securities decline. Chanos has been a pessimist, known as a “bear” in the investment industry, about China for years now.
Mainland Chinese also seem to share Chanos’s negative view on the Chinese economy; according to Ministry of Commerce data, investment capital is leaving the country.
From January to June of 2012, China invested $35.42 billion in 116 different countries and 2,163 different projects, an increase of 48 percent compared to the same period last year. What shows up in the aggregate data is also confirmed by on-the-ground reports.
Who Wants Assets in China?
The Economic Observer, a Chinese publication, reported the experience of an investor named Liu Yun (pseudonym), who went back to China near the end of 2009 from Canada. Unable to find a good project to invest in, he bought eight different real estate properties in Beijing.
“Though the income and profit from these properties is decent,” he said, “I will still sell some of them.” He said that he does not feel safe keeping his assets in China and ultimately wishes to keep only one property, saying, “Many mainlanders I know are transferring their wealth overseas, feeling that yuan-denominated properties are not very secure and that the future looks gloomy.”
In the same article a currency trader was quoted saying the Chinese yuan is expected to weaken.
A Move to the Dollar
Across the table from the People’s Bank of China (PBOC), on the other side of the trade, are many ordinary citizens and businesses. A worker at a China Construction Bank branch in Beijing recently said, “Currently US dollars are in high demand, for the past few days, any currency exchange in excess of $2,000 needs to have a prior reservation made.”
“Last year, we tried to sell insurance products with rates provided in RMB, it was very popular, this year sales are not going well.”
The most obvious way to circumvent the controls is to have the Chinese party provide financing to the foreign partner, thereby transferring funds out of China through this company.
A product manager at an insurance firm said, “Some people at a foreign bank told me, financial products in US dollars are selling well.”
This trend of abandoning RMB for dollars is even more obvious among businesses.
Companies move money out of China through overseas mergers and acquisitions, too, partly as a way of skirting China’s tight capital controls. Chinese financiers have developed other tricks of the trade in moving the money of the wealthy out of the country.
These moves also register in PBOC data. Some analysts are starting to worry because during the second quarter of 2012, China’s trade surplus decreased by a total of $68.7 billion.
Hongyuan Securities’ chief analyst, Fan Wei, warned in a research report that “currency fluctuations will seriously affect asset values in China.”
“Adding that reduction of the trade surplus to the $30 billion of direct foreign investment out of China shows a capital outflow of over $100 billion,” Fan wrote. “This will force domestic asset allocation to take into consideration the flow of capital, and the changes in exchange rates.”
That $100 billion could be just the beginning. Associate Professor of Political Science at Northwestern University, Victor Shih, estimates that the richest 1 percent of Chinese families have between $2 trillion and $5 trillion in wealth, and if a significant portion of those people start transferring their yuan to dollars, China could have serious problems. Shih pointed out in an interview with INETeconomics in April 2011 that the country’s $3.2 trillion in foreign reserves would not be large enough to cover for currency movements of that order.
Read the original Chinese article.
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