Money Flowing Out of China

What does the money flowing out of China mean for investment and investors? The New York Times reports on diminishing but still large Chinese currency reserves and what it all means.

China is burning through its huge stockpile of foreign exchange reserves at the fastest pace yet as it seeks to prop up its currency and stem a rising tide of money flowing out of the country.

Even after a record monthly decrease of nearly $100 billion, China still has the world’s biggest cache of foreign reserves, standing at $3.56 trillion at the end of last month, government data showed Monday.

The total has declined steadily from a peak of nearly $4 trillion in June of last year, as slowing economic growth caused investors to move money out of the country in search of better returns elsewhere. As a result, the Chinese central bank has had to sell huge amounts from its foreign reserves to maintain the strength of the nation’s currency, the renminbi.

The exodus of investors’ money accelerated last month after China made the surprise decision on Aug. 11 to devalue the renminbi by the most in over two decades. China’s foreign reserves fell $94 billion in the month, according to Monday’s report, as the central bank mounted an aggressive defense of the renminbi.

Our interest as investors is the money flowing out of China as its economy, currency and stock market weaken. Where will Chinese and other investors take the money flowing out of China, who will be hurt and who will prosper?

Foreign Direct Investment

We looked at foreign direct investment at the beginning of last year, before the Chinese stock market went on a tear, before the price of oil fell into the abyss and before it became obvious to the world that the Chinese economy is slowing down.

A very useful reference in this regard is the just published United Nations study, World Investment Report 2013. We have used 2007 and 2012 as bookend comparison years as 2007 was just before the onset of the worst recession in three quarters of a century and 2012 is the most recent year reported. Of note is that direct foreign investment has fallen in the large majority of nations but there are exceptions that should help guide investors with their fundamental analysis of where to put their money in the years ahead. First take a look at the data and then read about foreign direct investment.

As we noted in our article, investment capital follows growth and stability. When economies start to shrink or the political and social climate deteriorates money goes away. We can probably expect to see a continuing outflow of money from China to the stability and growth of the USA and the strength of the US dollar.

Follow the Leader

Bloomberg writes about the currency outflow caused by attempts by the People’s Bank of China trying to stem the devaluation of the Renminbi.

China’s foreign-exchange reserves fell by a record last month as the central bank sold dollars to support the yuan after the biggest devaluation in two decades spurred bets on continued weakness.

The currency hoard declined by $93.9 billion to $3.56 trillion at the end of August, from $3.65 trillion a month earlier. Economists surveyed by Bloomberg had forecast a median $3.58 trillion. The yuan weakened in offshore trading and 10-year Treasury futures contracts fell after the data.

The more this story is repeated the more people will want to repatriate Chinese investments and buy dollars. The flow of money out of China could become more dramatic and detrimental to the health of the world’s second largest economy. Investors with anything but a very long time line are well advised to avoid Chinese investments for the foreseeable future.

Money Flowing Out of China PPT


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