http://www.chinadaily.com.cn/english/doc/2004-06/30/content_344072.htm

http://www.chinadaily.com.cn/en/doc/2003-08/12/content_254169.htm

I don’t think the flow of assets in Asia makes sense from a “normal” viewpoint.

Capital flight is not an insignificant issue. Daewoo one day found that 80 billion US$ were missing from their balance sheet. Some of that sum probably never existed to begin with, but some of it probably still today provides some nice real estate, golf club memberships, luxury cars and gambling funds for the “survivors” somewhere in a nice sunny place.

If a single company in a tiny country with 50 million people and relatively insignificant foreign inflows can misplace 80 billion US$, what might happen in China? Embezzling half a billion dollars from the Bank of China certainly does not seem to pose to big of a problem, despite all the foreign shareholders and auditors…

http://www.chinadaily.com.cn/english/doc/2006-02/08/content_518248.htm

AP Simkin — I really need to learn more about the Japanese BoP data. It isn’t something that I regularly use, but now that the yen is looking a wee bit misaligned, well, I really need to find the time to look at it more closely.

Have you looked at the Balance of Offshore Accounts on the MOF website? Specifically, the yen call loans to nonresidents [top line]. Evidently, this does not include yen call loans to residents. For that, you can look at the BOJ balance sheet data on the banks. There is a specific item on yen call loans. Of course, this assumes that the carry trade is funded by call loans and that they are all done domestically.

Is the pileup of rmb liquidity offshore the counterpart of double invoicing? Once upon a time, such balances were held in dollars, but with the rmb on the rise versus the buck, it makes sense to keep the rmb offshore. Why do this? Rainy-day money. Or, accumulation of cash to be used for foreign investment. Or, as one of your contributors suggests, these could be balances owned by nonresidents.

1) Since the yuan overtook the HK dollar, the average Chinese seem to collectively have switched from doing business in HK$ into yuan:

http://www.chinadaily.com.cn/bizchina/2007-01/19/content_787505.htm

2) According to the same source, merchants in the Pearl River delta seemed to have made the switch even earlier, in October 2006.

3) Now suppose the Chinese rich, equally collectively, would switch their offshore dollars into offshore yuan (or start buying offshore yuan instead of dollar with new money).

4) This would mean a flood of offshore yuan, and a decrease in purchases of US treasury bills; BVI is one of the largest FDI sources for China, and every self-respecting Hong Kong company seems to have a BVI parent, so watching the British Virgin Islands might be a good indicator of what is going on offshore

5) As no economists or central banks are involved in this process, any of those moves might not necessarily have to make sense according to standard thinking. The rationale may be a combination of parking money somewhere safe and opportunistic gambling/speculation.

For this to have an impact, the numbers would have to be significant. But why not? What if 5%, 10% or 20% of the yuan that is supposed to sit in Chinese bank accounts has made its way elsewhere?

I don’t think US policy is blameless, but it is hard for me to argue that chinese policy hasn’t contributed in a big way to current imbalances. RMB depreciation (a policy choice) in the face of strong productivity growth (a good thing) combined with a rising fiscal surplus (a policy choice) and bank lending curbs to avoid inflation ( a policy choice) = massive increase in China’s current account surplus.

“Censorship of Chinese web sites set to intensify as ruling party looks to clamp down on free speech and anti-communist propaganda… The vast majority of those users have no access to overseas Chinese web sites offering uncensored opinion and news critical of the ruling party. But even in heavily monitored China, news of official misdeeds and dissident opinion has been able to travel through online bulletin boards and blogs. Hu told officials to intensify control even as they seek to release the internet’s economic potential. “Ensure that one hand grasps development while one hand grasps administration,” he said….” http://www.itpro.co.uk/internet/news/102956/chinese-communist-leader-wants-to-purify-internet.html

but that’s not the topic of this post.

“China is in fact not the real source of the global trade imbalance”, argue Chinese Economists. It also reflects the high savings rate and comparatively low level of consumer spending in China compared to the low savings rate and high spending in the United States. “Our trade partners, such as the United States and the European Union, should also shoulder the corresponding responsibilities,” said Mei Xinyu, an expert at the Chinese Academy of International Trade and Economic Cooperation, the research institute under the commerce ministry. An increase in technology imports from the US is also dependent on whether the US government removes or eases its export control policies toward end-users.

“…By directing its demand to dollar-priced commodities China has significantly contributed to their overvaluation versus other goods and services priced in US dollars. (Whilst China cannot print dollars and therefore lift prices of all the goods and services priced in US dollars, it can push prices of some goods relative to other goods)… For the time being, the loose monetary policy of China will continue to provide strong support for commodity prices. It is not possible to tell how long can China continue with its loose policy and rigid exchange rate…” http://www.mises.org/story/2134

“…The sustained economic boom has left the central government relatively awash in tax revenues but still unable or unwilling to spend the money on a host of problems that Beijing itself has identified as in urgent need of funding…” http://www.ft.com/cms/s/16fe2e00-ace2-11db-9318-0000779e2340.html

“…Every $1 of China’s overseas sales requires four times the energy used by the U.S, seven times that of Germany and ten times that of Japan, Vice Commerce Minister Gao Hucheng said last week, citing Chinese research…” http://www.bloomberg.com/apps/news?pid=20601087&sid=ap6lknQHqw8M&refer=home

“BMO Financial Group has been ranked the number one bank in the new Foreign Exchange currency pairs trading system in China. BMO leads the list of ten notable international competitors among approved market makers. No other North American institution ranks in the top 10…” http://www2.bmo.com/bmo/files/news%20release/4/1/bmo_yuan_trading_jan2306_en.htm

Bank of Montreal gets yuan license – http://www1.cei.gov.cn/ce/doc/cen2/200507062295.htm

“…Banks hope the visit by Canada’s second-highest-ranking cabinet minister will help smooth over a recent quarrel between the Harper government and Beijing over human rights… “The Chinese will know Flaherty is a key minister in Harper’s inner circle and they will see his arrival in China as a signal that Canada is prepared to move forward…” Bank of Nova Scotia spokesman Frank Switzer, who said Scotiabank is the only Canadian bank to have a branch in Shanghai, believes Flaherty’s name will help. “In the game of global competitiveness, it’s great to have support from government officials, particularly the Finance Minister,”…” http://chineseinvancouver.blogspot.com/2007/01/emerson-flaherty-to-meet-with-chinese.html

“…”Scotiabank will become the foreign strategic partner of Dalian Bank, while IFC will be a financial investor,” said a banking source, who declined to be identified… Scotiabank spokesman Frank Switzer declined to comment… IFC and Dalian Bank declined to comment…” http://chineseinvancouver.blogspot.com/2007/01/scotiabank-ifc-eyeing-stake-in-chinas.html

1) RMB is not broadly used in trade outside of China or with China. Those offshore RMB deposits most came from 2 sources. First, RMB is accepted to encourage Chinese tourists to spend more money when they are abroad. Second, frequent visitors to China like to keep some RMB cash at hand for convenience and for avoiding exchange cost.

2) Until now, as I understand, there is no formal channel for the offshore RMB to come back to China. You can call this capital control. (This is about to change, there is plan to create a RMB bond market in Hong Kong.) So the offshore RMB is really cash under the mattresses for any financial institute who has accepted the RMB deposit. I guess that the relative high supply of offshore RMB and the relative low demand explains the very low offshore interest rate.

3) As about “poor country”, I agree with HZ, the offshore RMB is interest free liability for PBoC and can only be viewed as benefit. Although China is “high-investment, fast growing”, it is not short of financial capital. The evidence is trillions of RMB deposit in the bank. The top scant resource for China at this point is a healthy and efficient financial system (or more broadly the market system). Even if the offshore RMB carry trade has any harm for China, that amount is so small comparing with the onshore deposit, the effect is negligible.