China Is Aware That There Is A Bubble

As China is facing the prospect of large capital inflows from investors betting on RMB appreciation in 2010, policymakers have made it easier for mainland Chinese to invest abroad. This may be adding to the massive fund inflows other regional markets have experienced in 2009, especially China’s SARs. China’s rapid credit growth and loose monetary policies are also encouraging the trend.

• WSJ: A bubbly property market in Hong Kong and record gambling revenues in Macau are partially a result of capital leaking out of China through “under-the-table transfers.” GaveKal Dragonomics says that the scale of the “shady money” coming from China’s loose credit and stimulus measures “is becoming slightly embarrassing for Beijing.” Capital controls are supposed to regulate the amount of money flowing to the SARs, but offshore bank accounts and other channels allow money to flow relatively freely. (11/23/09)
• Michael Casey, WSJ: “[A] booming China is importing easy money from the Fed at a time when it least needs it, and is then exporting the same to its similarly undeserving neighbors.” (11/18/09)

Measures Taken to Increase Capital Outflows

• On November 11, the State Administration of Foreign Exchange (SAFE) said it would expand a program that allows individuals to exchange up US$5,000 per-day to non-financial institutions. This helped to spark a rally in China’s B-shares, which are mainland shares denominated in foreign currencies. (Bloomberg, 11/13/09)
• In October SAFE announced US$1.5 billion in new quotas under the qualified domestic institutional investors (QDII) program, which allows mainland funds to be invested in overseas assets. These were the first new quotas granted in 17 months.
• In July 2009, SAFE eased rules on the use of foreign exchange by Chinese firms, which will allow companies to borrow in foreign currencies on the mainland, invest with their foreign exchange revenues, and seek new funding sources.
• China's outbound direct investment reached US$55.6 billion in 2008, nearly double the amount in 2007, but much lower than the US$92.4 billion of inbound direct investment. In 2009, the gap looks may narrow. Through Q3 2009, the Ministry of Finance reported US$32.8 billion in non-financial outbound FDI, up slightly from the same period last year. Meanwhile, FDI to China decreased 14% y/y over the same period.
• Mainland Chinese are limited to converting US$50,000 per-year into foreign currency, but investors often pool the quotas of family and friends to get around the limits.

p/s photo: Maggie Wu