Wednesday, May 16, 2012

China's "Dollar Shortage" and "Capital Outflow Problem is the Real Ticking Time-Bomb for Markets"

The sad truth that many don’t realise is that these moves to internationalise the currency have less to do with Beijing’s wish to modernise and much more to do with a need to draw dollars into the system to cover the country’s growing “dollar short” position.
But what happens if the strategy fails? What happens if foreigners decide the last thing they want is yuan exposure (due to China economic bubble fears), and would much prefer to keep hold of their US dollars?
What happens if instead of a dollar inflow you get a mass capital outflow from China, with as many Chinese as possible converting yuan-denominated assets into dollars, seeing the yuan fall in value versus the dollar due to what is now an over-valued position?
Recent developments in offshore/onshore markets and forward markets, unfortunately, seem to suggest this is exactly what’s happening.
Read it at FT Alphaville
Why China’s RMB exodus IS the story
By Izabella Kaminska

Hugh Hendry has recently stated that China will be the last shoe to drop. Although reliable data out of China continues to be sparse, signs are pointing in the wrong direction. China has been unable to materially alter the composition of its growth and will face significant challenges in trying to spur domestic consumption going forward. It remains unclear as to whether any country has ever achieved a soft-landing in bringing down inflation and investors don’t appear willing to place strong bets that China becomes the first. Currently markets remain focused on the disintegration of the Eurozone, but problems in China are growing in the background.  

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