Cash Exiting China

Something that I have thinking about for a few weeks – and was reminded of reading Ryan Avent this morning – is the series of pieces at FT Alphaville regarding the outflow of cash from China.  See here and here and here.  The thinking had been that the renminbi was a one-way bet as China moved forward with capital account liberalization as investors rushed to be part of the Chinese story.  The growing exodus of cash, however, is calling that story into question.

Moreover, I am interested in how much of the outflow is attributable to a generalized rush to safety as a result of the European crisis versus how much is attributable to capital flight due to a a deteriorating economic environment inside China itself.  I am reminded of this story from the Wall Street Journal earlier this year:

With a fortune of at least $1.6 million, Mr. Shi is part of the wealthy elite that benefited most from the Communist Party’s brand of capitalism. He is riding the crest of arguably the biggest economic expansion in history.

And yet, while the party touts the economic success of the “Chinese model,” many of its poster children are heading for the exits. They are in search of things money can’t buy in China: Cleaner air, safer food, better education for their children. Some also express concern about government corruption and the safety of their assets.

Domestic money in China will be the first to head for the exit – insiders will always know more than outsiders about the underlying economic conditions.  So the exodus of cash could indicate that the Chinese story is coming to a close – and that will have significant consequences for the global economy.  It is another signal that emerging markets will not be supporting global demand anytime soon.  I think the team at alphaville is right – this story is slipping under the radar while we all have our eyes focused on the farce in Europe.  But it could be the real game changer in the global economy.

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