Thread by @mnicoletos

1) Is China’s currency undervalued like the everyone seems to believe or overvalued?

Are #China’s FX reserves sufficient to prevent a further devaluation of the #Yuan (#RMB)?

Are #China’s FX reserves what they appear to be?

2) Why would China need to clamp down capital flight if the #Yuan is undervalued and/or FX reserves are more than enough, as China claims?

#China clamps down on capital flight risk as #yuan weakens asia.nikkei.com/Business/Marke…

3) Stricter bank oversight while real estate developers will have restricted access to foreign currency bonds. If the fin system is judged to be on the brink of instability SAFE will declare the situation "abnormal" & banks will be evaluated on the #Yuan amounts wired offshore.

4) If the levels are far from the national avg, the bank's grade will decrease facing limits on it's banking activities.

Given that #China has been giving reassurances about the financial health of tis economy and its adequate FX reserves this should not be necessary. But,

5) Looking back, until 2013, #China intervened massively in the FX market to strengthen its competitive position by buying #USD to keep the #Yuan (RMB) “cheap”. Since then however, China has intervened heavily on the other side, selling USD to defend the Yuan (RMB) from falling

6) #China has been able to maintain it quasi-peg via imposing capital contros. Despite all controls “hot money” seems to be leaving China via foreign earnings and funds’ transactions misreporting, among other things...

7) There have been many attempts to gauge the size of the capital outflows from China – since one important implication is how they affect the durability of the FX reserves. We can see how the official Chinese Yuan fixing is deviating from the actual Yuan traded in the market

8) Moreover, as #China’s #current_account dries up and FDI does not increase (due to #Capital_Controls and the fragility of the Chinese economy) #China’s #capital_account canot pick up the slack to cover for the balance of payments

9) As a reminder, China FX Reserves stand at 3.1tn USD. However, given the massive internal expansion FX Reserves as % of M2 are now only 11%. If it weren’t for the Capital Controls & the Current Account Surpluses all these years, the quasi-peg would have already broken.

10) A large portion of the #Yuan settlements relates to trading activity bw China and its counterparts. If we add the monthly value of exports + imports and we compare it to monthly FX settlements we observe that since 2017 there has been an avg monthly gap of > $60bn

11) Hence, if everything is fine in the land of the red dragon why all these discrepancies and why all this fuss about capital outflows. An economy growing at more than 6%, as China claims it is, would not need to put road blocks in outgoing capital flows.

12) Hence, #China is very worried about #HongKong?

HK serves as a trading & financial hub between China & ROW. Imports from HK account for ~15% of China’s Total Imports. >50% of those imports are exports that left China for HK and were re-exported back to China. So what’s next?