China’s capital outflow accelerates


Cross posted from Investing in Chinese Stocks

Up until this point, outflows have mainly been driven by wealthy people moving assets out of China and into overseas real estate and investments. Financial reforms are opening up the world to smaller and less internationally savvy investors, and the recent dip in the yuan has spurred them to take advantage of new opportunities.

WSJ: Cash From China Is Boon for Hong Kong

China’s devaluation of its currency, its slowing economy and its tanking stock market have been a boon for Hong Kong’s money-changers, bankers and wealth managers, who are getting flooded with business from nervous Chinese eager to move cash overseas.

The flood of cash is affecting the HK dollar peg:

The flood of cash into Hong Kong has gotten so strong that the city’s de facto central bank was forced to act on Tuesday. In its first intervention since April, the Hong Kong Monetary Authority sold 15.5 billion Hong Kong dollars, or $2 billion, to the market in an effort to push down the currency, which was at the high end of the narrow band in which it is allowed to trade against the U.S. dollar.

At the same time as this is going on China Boosts Efforts to Keep Money at Home:

Some of the country’s largest lenders, including Bank of China Ltd. and China Citic Bank Corp., are beefing up their internal checks on large foreign-exchange conversions by corporate clients, according to Chinese banking executives.

Chinese companies can exchange yuan for foreign currencies only for approved business purposes, such as paying for imports or approved foreign investments.

Meanwhile, financial regulators, together with the country’s security forces, are stepping up efforts to rein in illegal money-transfer agents who make a living by helping people move money out of China.

I doubt these capital outlets will cause a breakdown in the yuan. What policy makers need to fear is a general run on the yuan. If ordinary investors decide the yuan will not protect their savings, they can buy gold, property, Bitcoin and overseas assets, including within China via an ETF tracking a foreign market. By shutting the door to capital outflows, China increases the odds of capital finding its way into an investable asset, one that will display momentum properties and attract the herd looking for a quick buck. All the government is doing here is diverting the flow into unforeseen directions.

Regulation is a joke. All manner of corruption, rule bending and law breaking are fine as long as the music keeps playing. If I was in China and skirting the law, I would get legal very fast, or get out of the country. I hear there have been a lot of outflows lately…

Xinhua: Securities firms fined for profiteering amid stock market chaos

An investigation found that Shanghai-based Mecrt Corporation, Hangzhou-based Hundsun Technologies Inc. and Hithink Flush Information Network Co., Ltd. developed an operating system that allowed securities investors to trade without opening accounts via real-name registration, violating the Securities Act, said the China Securities Regulatory Commission.

With economists believing activity like this exacerbated the market rout, the regulator decided to confiscate the companies’ illegal earnings and impose additional penalties.

A total of 132.85 million yuan (20.88 million U.S. dollars) will be confiscated from Hundsun and it will be fined a further 398.56 million yuan. The regulator also issued a formal warning to company chairman Liu Shufeng and General Manager Guan Xiaolan and fined each of them 300,000 yuan.

Caixin: Amnesty as a Stepping Stone to Rule of Law

A recent amnesty declaration affecting convicted criminals deemed no threat to society was a poignant reminder of China’s tradition of prudent punishment, support for human rights and progress toward of rule of law.

…The latest amnesty order targets convicts who fought in the country’s wars of the 1930s and ’40s, namely the resistance against Japanese aggression and the civil war. It also covers veterans from other wars who helped “protect the nation’s sovereignty, security and territorial integrity” since the founding of the republic.

Also slated for pardoning are convicts over age 75 who are disabled or unable to care for themselves. Prisoners who were less than 18 years old when they committed a crime, were sentenced to less than three years in prison or have less than a year left on a sentence term may also be pardoned. By showing leniency toward these convicts, the program reflects the country’s traditional care for the elderly and young people.

It’s been estimated that several thousand convicts could qualify for the amnesty, which makes the program politically significant against the backdrop of the national commemoration of the war’s end.

A good way to stem outflows would be an amnesty for illegal fundraising, shadow bankers, and other gray market activities that have sprung up around a poorly constructed financial system. Adopt a common law approach to finance and legalize traditional Chinese methods of fundraising.