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Thread of 3 Articles: Does #China have enough #US dollars to survive the US #tradewar? - China’s US$3.1 trillion in foreign exchange reserves may not be sufficient to support a crisis in the economy, analysts say scmp.com/economy/china-…
This is the first article in a three-part series looking at China’s US dollar shortage risks amid the trade war with the United States as it plans to reform and internationalise its economy.
Beijing’s increasing scrutiny of US dollar usage by Chinese companies & individuals, in the absence of any signs of a financial crisis, + accelerating efforts to lure in foreign capital, have raised suspicions that the China's economy is worried about running short of US dollars.
On the surface, China should be the last country in the world to worry about a shortage – about two-thirds of its US$3.1 trillion worth of foreign exchange reserves, the world’s largest, are believed to be held in US dollar-denominated assets.
Huge foreign reserves & a stable currency don't reflect the true stresses in the economy, because those reserves may not be enough to provide the safety buffer needed to pay for China’s imports, pay off its debt in adverse circumstances if the yuan faced a devaluation.
“If there was a sudden shock to the country, China would not have enough dollars to support its currency,” said Kevin Lai, chief economist for Asia at Daiwa Capital Markets. “So that is why China needs to stop money outflows while creating inflows to support the yuan.”
The yuan is backed by its foreign exchange reserves, which are largely invested in US Treasury securities. China’s central bank might need those assets not only to prop up the yuan by intervening in foreign currency market, but also to bail out the domestic banking system.
The risk is that if China’s capital controls are ineffective, the exodus of funds and a portion of China’s reserves are not easily converted into cash, then the central bank will soon have insufficient funds to maintain currency stability.
China’s reserves are now less than 30% of GDP, down from 48% in 2010. At the same time, external debt ballooned to an all time high of $1.97 trillion last year. This means its $3.1 trillion in foreign reserves is about 1.6 times its external debt, enough for 1 year of imports.
Total Chinese bond issuance rose to $1 trillion in 2018, up from $927 million in 2017& $774 million in 2015. At the same time, corporate debt in China stood at 155 per cent of GDP in mid 2018, much higher than in other major economies & unlikely to be sustainable
By comparison, Japan’s corporate debt level is 100 per cent of GDP, and that of the US is 74 per cent. Furthermore, 1.2 trillion of foreign currency debt is due for payment this year.
As the trade war with the US escalates, the government is quietly tightening outbound money flows further, although according to Chinese law, citizens are allowed to withdraw as much as US$50,000 a year, but now many people report they were refused permission to do that.
Thread: Why is #US dollar access so restrained in China as trade war rages on? Foreign financial institutions increasingly reluctant to lend US dollars to Chinese banks because of financial risks scmp.com/economy/china-…
Foreign financial institutions increasingly reluctant to lend US dollars to Chinese banks given worries about financial risks amid the trade war - China holding onto US dollars by increasingly restricting business and individual transfers out of the country.
While China’s capital controls have limited how much access its citizens have to foreign currencies at home, banks and companies are finding it harder to obtain US dollars as the trade war also hinders foreign lenders’ willingness to supply the US dollar to a slowing economy.
After Beijing’s decision to step up capital controls, analysts say, underscores the perilous state of the economy, which was also reflected by the recent reluctance of foreign financial institutions to lend to Chinese banks and the nervous behaviour of Chinese citizens.
Recent cases of individuals refused permission to buy US dollars at Chinese banks have started to accumulate. “The harder it is to get around the capital controls, the more people want to obtain dollars.”
The nation’s foreign exchange regulator, the State Administration of Foreign Exchanges (SAFE), allows every Chinese citizen to exchange and withdraw up to US$50,000 a year in foreign currency, either in a lump sum or in instalments.
But Chinese individuals and companies still face major hurdles within that quota in the examination of their applications and declarations that indicate how and when the foreign exchange purchases are to be spent.
Additionally, banks are carefully scrutinising foreign currency withdrawals of US$3,000 or more in any single transaction, down from US$5,000 previously.
Beijing is clamping down on outflows because it needs to head off the possibility of a significant economic and financial upheaval, especially if it fails to reach an agreement with the United States at the G20 meeting this month.
“China is letting very little money to go out. Every time when they try to let [money] go out, the markets get too volatile for [China] to stand and they need to stop it immediately,” said Kevin Lai, chief economist for Asia, excluding Japan, at Daiwa Capital Markets.
My take: This is big people!!! This shows how weak the Chinese economy actually is. If China makes no deal with #Trump at the #G20 Summit, then Trumps imposes 25% tariff on $300 billion of CN imports & Bang, Chinese economy in deep trouble & no money to invest on the Belt & Road.
The Bank of #China is asking customers with #US dollars to exchange them for the local RMB currency, and giving rewards to those that do. This is an indication that the trade balance is getting tight due to the #tradewar and China needs to raise more foreign currency.
Thread: Is #China’s concern over a possible US dollar shortage risk forcing companies to sell overseas assets? - Anbang Insurance Group, Dalian Wanda Group & HNA Group have all been pressured to sell assets amid the trade war with the #UnitedStates scmp.com/economy/china-…
Anbang Insurance Group’s plan to sell its condos at the Waldorf Astoria hotel in New York, the latest in the string of Chinese divestments underscoring China’s concern that its running short of US dollars. Chinese oil giant CEFC China Energy wants to sell 100 properties worldwide
Chinese real estate mogul Wang Jianlin’s Dalian Wanda Group dumped $25 billion in assets since 2017, while troubled conglomerate HNA Group was forced to sell everything from Hong Kong land parcels, to its stakes in Deutsche Bank, Hilton Grand Vacations as well as its airlines.
China’s dramatic switch from encouraging overseas acquisitions to cracking down on risky lending & overseas transfers underscores worries that China could run short of US dollars to make interest & principal payments on its mounting debt when its account balance is under pressure
“These companies are selling their assets because they don’t have enough US dollars,” said Kevin Lai, chief economist at Daiwa Capital Markets. “China doesn't want to use its $3 trillion foreign reserves for debt repayments, so these companies need to sell their assets.”
But with state-owned banks having lent heavily to these trouble groups, China will not allow the conglomerates go bankrupt, meaning an increasing demand for US dollars is needed to support inefficient, cash strapped companies, complicating China’s risk of a US dollar shortage.
China also has the same need to its Belt and Road Initiative. On the surface, China should be the last country to worry about a US dollar shortage given that its US$3.1 trillion worth of foreign exchange reserves is the largest help by any nation.
But analysts believe China’s reserves may be insufficient to pay for its massive imports and debt payments in response to a worse-case scenario caused by the ongoing trade war with the United States, particularly since many of its assets cannot readily be turned into cash.
“In reality, they don’t have as much as US$3.1 trillion of liquid reserves,” said Rabobank analyst Michael Every. “I would estimate they probably only have a little bit more liquid reserves than what they hold in US Treasuries.”
US Treasury data shows that $1.1 trillion of China’s reserves are invested in US government bonds, with $200 billion invested in US agency debt and $280 billion in US corporate stocks, although its hard to get a good picture of the composition of its $3.1 billion reserves.
The remaining reserves may be invested in illiquid assets, including initial capital for China Investment Corporation, the nation’s sovereign wealth fund, the Silk Road Fund for the Belt & Road initiative & cash-for-commodities loans to countries like Venezuela.
It is no secret that China is suffering huge losses in many of its investments that are funded in US dollar and Hong Kong dollar-denominated borrowings in the international markets, which are likely to keep expanding each year.
“Offshore demand for US dollar debt & bank borrowings from these people is strong,” said Lai from Daiwa Capital Markets. “China needs them to keep borrowing US dollars, with most of the funds converted into yuan to create fresh capital inflows & prop up currency exchange rates.”
The root of the US dollar shortage goes back to the priority China places on maintaining stability & supporting its political objectives over maximising returns on its investments, with projects often failing to generate returns to make the accompanying debt burden worthwhile.
This means a continuous demand for US dollar-denominated lending from Chinese state banks by inefficient, cash-strapped companies and loss-making projects, is unlikely to stop.
“In China, there are capital controls & a desire from the government to not show any financial distress. But this happens at the cost of keeping many weak companies alive. Most bankers & investors feel a more efficient allocation of capital & a more open economy would be better.”
Data shows China’s external debt rose 12% year-on-year to $1.97 trillion in 2018, mainly to increase in US dollar borrowing by Chinese companies. Xi’s Belt & Road initiative to promote infrastructure development is largely financed in US dollars, adding to worries of a shortage.
A total of $614 billion has been invested by China in Belt and Road initiative projects, with another US$5 trillion of funding projected to be required by 2038, according to Veasna Kong, an economist at Moody’s Analytics.
But China & participating countries are becoming wary that these projects can succeed commercially after new Belt & Road initiative construction contracts slumped to around $63 billion last year from a peak of $97 billion in 2016.
“Compounded by China lack of transparency on the projects, there are doubts on the effectiveness of the projects. Its difficult to raise project financing for Belt & Road projects on acceptable terms, manage financial risks & get profitable returns because of related high risks.
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