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China Encouraging More Capital Outflows To Ease Pressure On Yuan

China Encouraging More Capital Outflows To Ease Pressure On Yuan

Back in August 2018 we observed a historic event for China’s economy: for the first time in its modern history, China’s current account balance for the first half of the year…

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2 years ago

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China Encouraging More Capital Outflows To Ease Pressure On Yuan

Back in August 2018 we observed a historic event for China's economy: for the first time in its modern history, China's current account balance for the first half of the year had turned into a deficit. And while the full year amount reverted back to a modest surplus, it was only a matter of time before one of the most unique features of China's economy - its chronic current account surplus - was gone for good.

Then, a few months later also in 2018, UBS wrote that the upcoming loss of China's current account cushion would soften domestic activity, which coupled with the emerging US-China trade war, would mean that "for the first time in 25 years, China would have to make a choice between external stability and growth." This was followed by the Wall Street's Journal bringing attention to this topic, calling it a "tectonic shift" in China's economy, which has largely gone unnoticed by investors, and which is "quietly beginning to upend the global financial system."

And yet, a few years later such predictions of a "tectonic shift" in both China's economy and in global fund flows have yet to materlialize for the simple reason that thanks to covid, China's current account which was on the cusp of turning into a deficit, exploded into a massive surplus the likes of which China had not seen since 2016 thanks to the breakout of the oh-so-convenient-for-Beijing covid pandemic, which crippled global economies and sparked a Chinese export boom (mostly related to items linked to Covid which the world couldn't find anywhere else).

Yet while covid proved to be the capital "Hail Mary" Beijing urgently needed, China's resurgent economy (and current account) brought with it a fresh headache, namely massive capital outflows inflows as a result of global investors flocking into local capital markets as China emerged an island of stability in a world crippled by the pandemic. The result: a unprecedented surge in the Yuan, which reached a level just shy of where it was in 2015 when Beijing was forced to devalue the currency.

But more importantly, it's why as Caixing reports, in 2020 China reported its first annual deficit on the financial account in its balance of payments in four years as regulators allowed more money to flow out of the country to ease appreciation pressure on the yuan stemming from rising foreign investment in the country’s capital markets.

The 2020 deficit, excluding reserve assets held by the central bank, amounted to $77.8 billion, although that’s down from an initial estimate of $175.9 billion given in February, according to revised figures for the balance of payments released by the State Administration of Foreign Exchange (SAFE) on Friday. It’s the first shortfall since 2016 when the country had a financial account deficit for the year, excluding reserve assets, of $416.1 billion. The financial account includes domestic ownership of foreign assets –– such as deposits, loans, securities, commodities and direct investment –– and foreign ownership of domestic assets.

"The deficit on the financial account excluding reserve assets shows that the accumulation of overseas assets by China’s private sector is continuing,” the administration said in a report (link in Chinese) accompanying the data. “First, domestic residents have increased their investment in overseas securities, which shows that demand to diversify assets (in investment portfolios) is strong. Second, outbound direct investment has been rational and orderly. Third, banks have increased their deposits and loans overseas, as the current account surplus has provided relatively abundant foreign currency liquidity."

Meanwhile, as shown in the chart above, the yuan appreciated 8.8% against the U.S. dollar in the second half of 2020, ending the year at 6.50 per dollar, up from 7.13 per dollar at the end of May.

“Amid the continued appreciation of the yuan since June 2020, China’s foreign exchange policies have focused on increasing the flexibility of the exchange rate, expanding capital outflows and controlling capital inflows,” Guan Tao, chief global economist at BOC International Co. Ltd. wrote in a Feb. 23 report (link in Chinese) on the preliminary balance of payments data. He said he expected this foreign-exchange policy mix to continue as the “orderly expansion of capital outflows is an important policy tool to cope with the appreciation pressure on the yuan."

In other words, don't be surprised to see a fresh flood of Chinese real-estate buyers in Vancouver, California and the Tri-State area.

Until then, Chinese investors are making do with foreign bonds: according to data from China Central Depository and Clearing Co. Ltd. and the Shanghai Clearing House, outstanding overseas holdings of bonds traded in the onshore interbank market rose to 3.25 trillion yuan ($495 billion) at the end of December, a net increase of 1.1 trillion yuan from a year earlier.

In an interview with Caixin, Guan said that foreign exchange in the onshore market was abundant in 2020, allowing banks to absorb domestic deposits in foreign currency and then deposit or lend them abroad.

Growing confidence in China’s recovery from the Covid-19 pandemic as other major economies continued to suffer, and higher yields on Chinese government bonds compared with U.S. Treasuries also contributed to an increase in inflows of foreign capital last year.

Ironically, three years after fears of a current account deficit sparked worries on Wall Street about how China would fund itself in the global capital markets, the abundance of foreign currency liquidity, especially the U.S. dollar, led to a decrease in the cost of financing in foreign currency which led to an increase in domestic loans made in foreign currency, said Wang Youxin, a senior researcher at a research institute backed by Bank of China.

Overall, China had a balance of payments surplus of $168.1 billion in 2020, comprising a current account surplus of $274 billion, and a combined capital and financial account deficit of $105.8 billion, the latest data show. That compares with $129.2 billion in 2019 and $177.4 billion in 2018, according to revised SAFE figures.

The financial account involves equity investment and debt financing, while the current account measures a country’s total trade in goods and services plus earnings on cross-border investments. Under the financial account, direct investment and portfolio investment had a surplus of $102.6 billion and $87.3 billion, respectively, while other investment had a deficit of $256.2 billion, up 160% from 2019, the data show. Other investment includes all financial transactions not considered direct investment, portfolio investment, financial derivatives, employee stock options, or reserve assets.

In 2020, net outflows in other investment amounted to $314.2 billion, the highest since a deficit of $349.9 billion in 2016. This mainly comprised greater net outflow of deposits of $130.4 billion, 28% higher than in 2019, and a net jump in cross-border loans of $128.2 billion which reversed a net decline of $26 billion in 2019, as banks increased their overseas lending and companies added to their overseas deposits amid ample liquidity, according to the SAFE report.

Domestic deposits in foreign currency jumped by $131.6 billion in 2020, the largest increase since 2014, while loans in foreign currency grew by $80.2 billion, the most since 2013, according to data (link in Chinese) from the People’s Bank of China.

For portfolio investment, cross-border funds flowed actively into and out of the Chinese mainland in 2020, SAFE wrote in its report. Last year, domestic investors bought a net $167.3 billion of overseas stocks and other types of securities, while their overseas counterparts purchased a net $254.7 billion in the Chinese securities markets, both hitting a record high since the data series on international balance of payments began in 1982.

Tyler Durden Sat, 04/03/2021 - 16:00

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International

Costco Tells Americans the Truth About Inflation and Price Increases

The warehouse club has seen some troubling trends but it’s also trumpeting something positive that most retailers wouldn’t share.

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26 mins ago

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May 28, 2023

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Costco has been a refuge for customers during both the pandemic and during the period when supply chain and inflation issues have driven prices higher. In the worst days of the covid pandemic, the membership-based warehouse club not only had the key household items people needed, it also kept selling them at fair prices.

With inflation -- no matter what the reason for it -- Costco  (COST) - Get Free Report worked aggressively to keep prices down. During that period (and really always) CFO Richard Galanti talked about how his company leaned on vendors to provide better prices while sometimes also eating some of the increase rather than passing it onto customers.

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That wasn't an altruistic move. Costco plays the long game, and it focuses on doing whatever is needed to keep its members happy in order to keep them renewing their memberships.

It's a model that has worked spectacularly well, according to Galanti.

"In terms of renewal rates, at third quarter end, our US and Canada renewal rate was 92.6%, and our worldwide rate came in at 90.5%. These figures are the same all-time high renewal rates that were achieved in the second quarter, just 12 weeks ago here," he said during the company's third-quarter earnings call.

Galanti, however, did report some news that suggests that significant problems remain in the economy.

Costco has done an incredibly good job at holding onto members.

Image source: Xinhua/Ting Shen via Getty Images

Costco Does See Some Economic Weakness

When people worry about the economy, they sometimes trade down when it comes to retailers. Walmart executives (WMT) - Get Free Report, for example, have talked about seeing more customers that earn six figures shopping in their stores.

Costco has always had a diverse customer base, but one weakness in its business may be a warning sign for its rivals like Target (TGT) - Get Free Report, Best Buy (BBY) - Get Free Report, and Amazon (AMZN) - Get Free Report. Galanti broke down some of the numbers during the call.

"Traffic or shopping frequency remains pretty good, increasing 4.8% worldwide and 3.5% in the U.S. during the quarter," he shared.

People shopped more, but they were also spending less, according to the CFO.

"Our average daily transaction or ticket was down 4.2% worldwide and down 3.5% in the U.S., impacted, in large part, from weakness in bigger-ticket nonfood discretionary items," he shared.

Now, not buying a new TV, jewelry, or other big-ticket items could just be a sign that consumers are being cautious. But, if they're not buying those items at Costco (generally the lowest-cost option) that does not bode well for other retailers.

Galanti laid out the numbers as well as how they broke down between digital and warehouse.

"You saw in the release that e-commerce was a minus 10% sales decline on a comp basis," he said. "As I discussed on our second quarter call and in our monthly sales recordings, in Q3, big-ticket discretionary departments, notably majors, home furnishings, small electrics, jewelry, and hardware, were down about 20% in e-com and made up 55% of e-com sales. These same departments were down about 17% in warehouse, but they only make up 8% in warehouse sales."

Costco's CFO Also Had Good News For Shoppers

Galanti has been very open about sharing information about the prices Costco has seen from vendors. He has shared in the past, for example, that the chain does not pass on gas price increases as fast as they happen nor does it lower prices as quick as they sometimes fall.

In the most recent call, he shared some very good news on inflation (that also puts pressure on Target, Walmart, and Amazon to lower prices).

"A few comments on inflation. Inflation continues to abate somewhat. If you go back a year ago to the fourth quarter of '22 last summer, we had estimated that year-over-year inflation at the time was up 8%. And by Q1 and Q2, it was down to 6% and 7% and then 5% and 6%," he shared. "In this quarter, we're estimating the year-over-year inflation in the 3% to 4% range."

The CFO also explained that he sees prices dropping on some very key consumer staples.

"We continue to see improvements in many items, notably food items like nuts, eggs and meat, as well as items that include, as part of their components, commodities like steel and resins on the nonfood side," he added.

  

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Government

‘Kevin Caved’: McCarthy Savaged Over Debt Ceiling Deal

‘Kevin Caved’: McCarthy Savaged Over Debt Ceiling Deal

Update (1345ET): The hits just keep coming for Speaker Kevin McCarthy, as angry Republicans…

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2 hours ago

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May 28, 2023

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'Kevin Caved': McCarthy Savaged Over Debt Ceiling Deal

Update (1345ET): The hits just keep coming for Speaker Kevin McCarthy, as angry Republicans have been outright rejecting the debt ceiling deal which raises it by roughly $4 trillion for two years, doesn't provide sticking points sought by the GOP.

In short, Kevin caved according to his detractors.

Some Democrats aren't exactly pleased either.

"None of the things in the bill are Democratic priorities," Rep. Jim Himes (D-CT) told Fox News Sunday. "That's not a surprise, given that we're now in the minority. But the obvious point here, and the speaker didn't say this, the reason it may have some traction with some Democrats is that it's a very small bill."

*  *  *

After President Biden and House Speaker Kevin McCarthy (R-CA) struck a Saturday night deal to raise the debt ceiling, several Republicans outright rejected it before it could even be codified into a bill.

Here's what's in it;

  • The deal raises the debt ceiling by roughly $4 trillion for two years, and is consistent with the structure of budget deals struck in 2015, 2018 and 2019 which simultaneously raised the debt limit.
  • According to a GOP one-pager on the deal, it includes a rollback of non-defense discretionary spending to FY2022 levels, while capping topline federal spending to 1% annual growth for six years.
  • After 2025 there are no budget caps, only "non-enforceable appropriations targets."
  • Defense spending would be in-line with what Biden requested in his 2024 budget proposal - roughly $900 billion.
  • The deal fully funds medical care for veterans, including the Toxic Exposure Fund through the bipartisan PACT Act.
  • The agreement increases the age for which food stamp recipients must seek work to be eligible, from 49 to 54, but also includes reforms to expand who is eligible.
  • Claws back "tens of billions" in unspent COVID-19 funds
  • Cuts IRS funding 'without nixing the full $80 billion' approved last year. According to the GOP, the deal will "nix the total FY23 staffing funding request for new IRS agents."
  • The deal includes energy permitting reform demanded by Republicans and Sen. Joe Manchin (D-WV)
  • No new taxes, according to McCarthy.

Here's McCarthy acting like it's not DOA:

Yet, Republicans who demanded deep cuts aren't having it.

"A $4 trillion debt ceiling increase?" tweeted Rep. Andrew Clyde (R-GA). "With virtually none of the key fiscally responsible policies passed in the Limit, Save, Grow Act kept intact?"

"Hard pass. Hold the line."

"Hold the line... No swamp deals," tweeted Rep. Chip Roy (R-TX)

"A $4 TRILLION debt ceiling increase?! That's what the Speaker's negotiators are going to bring back to us?" tweeted Rep. Dan Bishop (R-NC). "Moving the issue of unsustainable debt beyond the presidential election, even though 60% of Americans are with the GOP on it?"

Rep. Keith Self tweeted a letter from 34 fellow House GOP members who are committing to "#HoldTheLine for America" against the deal.

"Nothing like partying like it’s 1996. Good grief," tweeted Russ Vought, President of the Center for Renewing America and former Trump OMB director.

In short:

Tyler Durden Sun, 05/28/2023 - 11:30

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Government

“Hard Pass”: Here’s What’s In The Debt Ceiling Deal Republicans Are About To Nuke

"Hard Pass": Here’s What’s In The Debt Ceiling Deal Republicans Are About To Nuke

After President Biden and House Speaker Kevin McCarthy (R-CA)…

Published

5 hours ago

on

May 28, 2023

By

"Hard Pass": Here's What's In The Debt Ceiling Deal Republicans Are About To Nuke

After President Biden and House Speaker Kevin McCarthy (R-CA) struck a Saturday night deal to raise the debt ceiling, several Republicans outright rejected it before it could even be codified into a bill.

Here's what's in it;

  • The deal raises the debt ceiling by roughly $4 trillion for two years, and is consistent with the structure of budget deals struck in 2015, 2018 and 2019 which simultaneously raised the debt limit.
  • According to a GOP one-pager on the deal, it includes a rollback of non-defense discretionary spending to FY2022 levels, while capping topline federal spending to 1% annual growth for six years.
  • After 2025 there are no budget caps, only "non-enforceable appropriations targets."
  • Defense spending would be in-line with what Biden requested in his 2024 budget proposal - roughly $900 billion.
  • The deal fully funds medical care for veterans, including the Toxic Exposure Fund through the bipartisan PACT Act.
  • The agreement increases the age for which food stamp recipients must seek work to be eligible, from 49 to 54, but also includes reforms to expand who is eligible.
  • Claws back "tens of billions" in unspent COVID-19 funds
  • Cuts IRS funding 'without nixing the full $80 billion' approved last year. According to the GOP, the deal will "nix the total FY23 staffing funding request for new IRS agents."
  • The deal includes energy permitting reform demanded by Republicans and Sen. Joe Manchin (D-WV)
  • No new taxes, according to McCarthy.

Here's McCarthy acting like it's not DOA:

Yet, Republicans who demanded deep cuts aren't having it.

"A $4 trillion debt ceiling increase?" tweeted Rep. Andrew Clyde (R-GA). "With virtually none of the key fiscally responsible policies passed in the Limit, Save, Grow Act kept intact?"

"Hard pass. Hold the line."

"Hold the line... No swamp deals," tweeted Rep. Chip Roy (R-TX)

"A $4 TRILLION debt ceiling increase?! That's what the Speaker's negotiators are going to bring back to us?" tweeted Rep. Dan Bishop (R-NC). "Moving the issue of unsustainable debt beyond the presidential election, even though 60% of Americans are with the GOP on it?"

Rep. Keith Self tweeted a letter from 34 fellow House GOP members who are committing to "#HoldTheLine for America" against the deal.

"Nothing like partying like it’s 1996. Good grief," tweeted Russ Vought, President of the Center for Renewing America and former Trump OMB director.

In short:

Tyler Durden Sun, 05/28/2023 - 11:30

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