China’s Economy on Paper
In a series of published reports, China has given the world the impression that its economy has been prospering. However, this may not be entirely accurate.
According to data, it seems that less money is being circulated outside China over the past 12 months.
China bought government bonds from the U.S. in the last quarter of 2016. However, overall holdings fell by about $190 billion last year. FOREX reserves may have decreased at a slower rate in January but they fell below $3 trillion in 2016.
“The faster we get to $2.5 trillion, the quicker the sense of eventual disarray will be,” said Junheng Li, the Founder of equity research firm JL Warren Capital. “Additional tightening of capital controls is likely. However, we are starting to see restrictions imposed on areas with increasing marginal cost. Therefore, one needs to wonder if they will be able to slow down much further the pace of outflows.”
Li estimates that around $70 billion circulates outside China each month.
This isn’t the first time that China has presented contradictory reports. Despite reports of growth, FXCM reported that some experts have voiced their concerns about China manipulating its government data. The report went onto state that even Li Keqiang, current Premier of the State Council of the People’s Republic of China, was skeptical whether some of the data presented by the country was accurate. In 2007, The Premier said that China’s GDP was “man made” and was therefore not dependable for analytical use. He said that the GDP figures were “for reference only”.
Recently, China’s capital Beijing tightened the control on individuals taking money outside the country. As a result, Chinese investors seem to being show less interest in buying assets in USD.
However, the Yuan could be in trouble again as the U.S. Federal Reserve moves to keep interest rates high this year could strengthen the dollar. According to speculation, this year could end with interest rates twice as high as they were when the stimulus package was still in place in the U.S.
“As long as the U.S. is in a tightening environment, we’ll likely see capital outflows” stated Francis Cheung, Head of China-Hong Kong strategy, a brokerage and investment firm based in Hong Kong.
If the USD’s strength declines, experts say it will probably be because of Trump’s unpredictability that directly affects the economy. However, the main factor that keeps the USD strong is the Federal Reserve’s high interest rates so investors are positive that the currency will stay strong despite minor fluctuations.