Signs point to hot money once again flooding into China, amid expectations that returns can be made from a strengthening of the yuan or from rising asset markets.
Last week, for instance, we learned China's reserves hit another record high of $2.27 trillion, despite lower trade surpluses.
One reason pressure is building on China's currency to rise is that its peg to the weakening U.S. dollar has seen it undergo a substantial devaluation against other currencies, despite China being one of the few areas of strength in the world economy.
We now appear to have a turning point in exports and money flows, which could add momentum to asset bubbles, while posing new challenges for policy makers.
After retreating in the first six months of the year, hot money is now heading back to China. Standard Chartered said recent data show bank inflows unexplained by valuation effects, trade, and foreign direct investment amounted to $15.4 billion in July, $5.6 billion in August, and $19.7 billion in September
As well as money inflows, Standard Chartered believe onshore fund movements also are driving this phenomenon, due to surging dollar borrowing seen in rising foreign-currency loans.
This, they note, last happened in late 2007, when expectations of yuan appreciation were at their highest. The banks said that in the fourth quarter of 2007 and first quarter of 2008, onshore banks lent out U.S. dollars worth the equivalent of 420 billion yuan ($61.5 billion). Now in just the four months from May to August, banks have loaned CNY560 billion - twice as much on a monthly basis.
The explanation for the focus on the yuan is the effective devaluation it has seen in the past year, as authorities kept it roughly pegged to the U.S. dollar in the face of an export collapse. As the greenback has fallen against the likes of the yen, euro and Aussie dollar, so too has the yuan. For example, the yuan has now lost roughly 25% against the Australian dollar in the past year.
Now we could be at a turning point. September figures show exports are recovering, meaning there is less need to hold the currency back to gain a trading advantage. Last Wednesday, China released figures showing exports in September were up 12% from the previous month, and almost 30% higher than the levels of six months earlier.
At the same time, there is new evidence money-supply growth in China is accelerating, boosted by swelling foreign exchange reserves. From August to September, new loans rose from CNY410.5 billion to CNY516.7 billion - ahead of expectations - while money-supply levels of M0, M1 and M2 sped their growth, respectively, from 11.5%, 27.7% and 28.5% in August to 16.0%, 29.5% and 29.3% last month.
Attention is turning to China's likely response. Standard Chartered said regulators may have room to raise interest rates. The problem, however, is this may just act as a magnet for more hot money seeking the interest-rate differential, which will in turn generate more upward pressure on the yuan. If the yuan does not move, asset bubbles look more likely with this type of monetary growth.
As usual, if you are looking to gauge the money flood, Hong Kong is a good place to start, where we are seeing fresh signs of froth.
Hong Kong luxury property market is in overdrive. Last week an apartment went for 71,280 Hong Kong dollars ($9,197) per square foot, for a total of HK$439 million, notching up a new world record. It was also reported that the proportion of mainland Chinese buyers in Hong Kong property is at an all-time high. While the numbers are huge, there is speculation that these stratospheric prices are not necessarily straight transactions, with perhaps other assets thrown in or cash refunds.
We are also hearing unconfirmed reports of a new phenomenon of property-swapping to help mainland Chinese buyers get round restrictions on yuan convertibility. This works where a mainlander and a Hong Kong resident come to a gentleman's agreement, whereby the Hong Kong resident buys a local property on behalf of the mainlander, who also buys a property in China for the equivalent amount for the Hong Kong resident.
Last week, the spiraling price of property also made it to the Hong Kong Legislative Council debates, although Chief Executive Donald Tsang said he's not worried, so long as it remains in the luxury sector. (In Hong Kong, 1,000 square feet is classified as luxury.)
Still, if not in Hong Kong, there must be a rising possibility authorities will need to introduce new policy measures to contain this hot money.
Last week, Guangdong provincial introduced new curbs on visitors to Macau. And at the weekend, there were new media reports that Beijing was preparing for an exit strategy for its easy money policy.
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