China is Cooking the “Capital Outflow” Books

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Since late 2013, the investment strategy that has worked far more than others has a lot to do with meticulously tracking global political risk, especially out of China.  Investors who have been patient, sitting back while waiting for market fear have been rewarded by putting capital to work into panics.  Chasing rallies has been a fools game, keeping an eye on global systemic risk is the key to finding the next opportunity.

Goldman Sachs is wisely back beating on the capital flows warning drum.   Today, in a new report they estimate 56% and 87% of outflows took place through offshore yuan market in July and August; and that was before the latest surge in the USD.  Our data shows similar panic in terms of actual capital leaving the country.

As the Bear Traps Report did in June, Goldman Sachs started including yuan funds in its analysis of outflows in July, after noting that cross-border movement of the currency masked actual pressures.

As the U.S. Federal Reserve tries to make any move toward a rate hike, China has been the victim.  China’s currency, the yuan is pegged to the dollar.  A surging greenback makes anything China sells to the world more expensive, putting them at a trade disadvantage globally.

Pick up our latest report, “What the Great China Devaluation means for US Equities” here:

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Yuan cross border payments surged to near $30B in August (that’s compared with a monthly average of $4.4 billion in the five years through 2014).   Outflows are far bigger than they appear in our view, China’s been cooking the outflow books since February in an effort to punish shorts.

After last year’s bloodbath, China’s foreign-exchange reserves appear to have stabilized and lenders’ net foreign-exchange purchases for clients have fallen close to a one-year low.

China’s currency outflows have been closely linked to surges in US equity market volatility, pick up our report here:

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rmb-flowsThe most dangerous men on earth might just be those 13 central planners in a room in Beijing.  They can cook the books all they want but elephants leave footprints.  Money is still pouring out of China.  A surging amount of capital is exiting the country in yuan rather than in dollars.

Pure common sense will tell you such colossal cross-border moves can’t be explained by market-driven factors and need to be taken into account when measuring currency outflows.

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Three month CNH volatility has been tame as speculators have been licking their wounds, preparing for their next attack, next move.

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Behind the scenes there is some taboo control, unwritten rules as to how much the PBOC (China’s Central Bank) will allow companies to convert into dollars onshore.  As a result, they need to move the money overseas in yuan.  When you connect the dots, a 5 year old can tell you the cash hemorrhage continues out of China.

Companies in China are fearful of a depreciating currency, it’s a hot potato they don’t want to hold, so they sell it to offshore banks. This pressures the offshore yuan’s exchange rate.

 

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