A Quarter-Trillion Bucks Pours Out of China

On the latest news about capital outflows, some analysts are claiming that we should finally call this what it is: capital flight. In a brilliant piece in The Telegraph, Ambrose Evans-Pritchard examines the question:

China is engineering yet another mini-boom. Credit is picking up again. The Communist Party has helpfully outlawed falling equity prices.

Economic growth will almost certainly accelerate over the next few months, giving global commodity markets a brief reprieve.

Yet the underlying picture in China is going from bad to worse. Robin Brooks at Goldman Sachs estimates that capital outflows topped $224bn in the second quarter, a level “beyond anything seen historically”.

The Chinese central bank (PBOC) is being forced to run down the country’s foreign reserves to defend the yuan. This intervention is becoming chronic. The volume is rising. Mr Brooks calculates that the authorities sold $48bn of bonds between March and June.

Charles Dumas at Lombard Street Research says capital outflows – when will we start calling it capital flight? – have reached $800bn over the past year. These are frighteningly large sums of money.

China is a fiscal totalitarian. It controls both the information and the facts about its markets, which is why it was seemingly able to stop that precipitous drop in its stock market earlier this month. But that being said, Beijing is trying to liberalize its economic policies, and it’s allowed private Chinese capital to do what capital always wants to do—take the path of least resistance to the destination of greatest reward. Often, that destination is outside China’s boundaries. In other words, as China liberalizes economically, you’d expect capital outflows; no global investor who isn’t crazy would want an all-China portfolio. But, as the Telegraph piece details, it sounds like smart people are saying it’s gone beyond that.

Read the whole thing, in which Evans-Pritchard echoes Walter Russell Mead’s latest thoughts on the issue. Both conclude that, in effect, China’s economy has already gone over the cliff. But like Wile E. Coyote, it will stay there hanging in the air, until it looks down.

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