As Twofish says, cashing up a foreign company isn’t the same as pulling out of China.

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Twofish: “Face” is personal, not corporate. Companies don’t lose face, but people most certainly do. Classify under “to be avoided, if at all reasonable.”

If China’s euros, pounds, yen and other non-dollar reserves were managed as a separate portfolio, China’s non-dollar portfolio would be bigger than the total reserves of all countries other than Japan. Changes in the market can seriously affect Chi…

Lots of Chinese work in investment banks, and the point of a banking system is to move money from point A to point B. If you have the authority from SAFE to exchange RMB and dollars, then pretty soon you’ll want to talk to a global bank and a global bank will want to talk with you.

I mean, if you are a rich Hong Kong or Taiwanese tycoon, you aren’t going to keep your money in suitcases under your mattress or going in pawn shops, you are going to have a talk with private bankers at Goldman-Sachs, JPMorgan, Morgan Stanley, HSBC etc., who more than likely if they are working in Hong Kong or Taipei are Chinese.

Curiously, private banking for hyper-wealthy people is something that very few Chinese banks are terribly interested in, and hyperwealthy Chinese tend not to be interested in local banks, because they don’t have global reach. If you are a hyperwealthy tycoon, you might want to invest your money in Kentucky horse farms. A global bank will let you do that. Most Chinese banks can’t do that (yet).

If you happen to have the ability to move currency in and out of southern China, at that point the big global banks will want to talk to you, with lots of rather highly paid lawyers figuring out what can be done and what can’t be.

There’s nothing illegal or even particularly nefarious about this. Investment banks are very keen to follow the letter of the law and regulations, lest Chinese regulators shut them down. However at the same time, banks will push the law as far as it will go which is actually pretty far.

Because it is costless to move money (just a few keystrokes on a computer), if you have to go through twenty steps to move dollars in and out of the PRC, you will take those steps.

I do think that there are some “exotic” stereotypes that don’t accurately represent what is really going on.

When people think “Chinese people moving money”, I think people get the image of Chinatown pawn shops and suitcases full of cash, rather than a conference room in Hong Kong or Shanghai with Harvard MBA’s and lawyers (most of them Chinese) sitting in front of laptops on a conference call with people in New York and London staring at a white board, although for the really really big sums, the second picture is a lot more accurate.

We are looking only at rises of $50 billion. Some of the outflow did make it to Taiwan or Hong Kong, but not most of it. Taiwan and Hong Kong were “along for the ride” but the major investment flows were driven elsewhere by global banks.

One terminology point. Neither Taiwan or HK Chinese are regarded as “overseas Chinese.”

bsetser: HK was a big source of inflows for a while as HK residents had the capacity to put funds on deposit in rmb legally. that inflow and the reverse outflow clearly was mediated by the banking system. with some other flows, i am not so sure.

And Hong Kong and Taiwan export businesses have pretty extensive authority to move currency in and out to cover trade credit. Once you have any ability to change currency, then lots of people suddenly are interested in being friends with you, and it becomes rather trivial to “resell” your authority.

Something that would be interest would be to see the extent to which HK and Taiwan were just conduits for money from the rest of the world. So you have $150 billion going through HK, but only about $20 billion stays there.

As far as where all these Chinese currency reserves are ending up. One notes that there has been this suddenly flood of domestic money in the United States buying Treasuries.

Once the flows got into Mainland China, then it enters the informal banking system, but getting the money in and out of Mainland China appears to be quite formal.

I do suspect that at the end of all this, we’ll find the Western banks and hedge funds have a lot more exposure and connections to informal banking systems than Chinese banks ever did.

2fish — do take a look at the rise in HK and Taiwan’s reserves recently. that suggests much of the outflow from china found its way there. HK was a big source of inflows for a while as HK residents had the capacity to put funds on deposit in rmb legally. that inflow and the reverse outflow clearly was mediated by the banking system. with some other flows, i am not so sure.

tono — the detailed survey data has data on the maturity distribution of central banks holdings of treasuries. the last data point is mid-07 tho. my operating assumption has been that china held a larger share of longer term (5 year and up) treasuries than the central bank norm. that tho is an assumption based on the anecdote more than anything from hard data. certainly china has more “liberal” reserve management guidelines than the guidelines many other countries have that preclude holdings bonds with a maturity of over 3 or over 5 years.

over the last 6 months, though, we know that china has been shifting heavily toward t-bills, so the survey data doesn’t tell us all that much about the current maturity distribution of china’s holdings