The Wall Street Journal this week observed that money is leaving China. It has been doing so off and on since the economic crisis began, and during the last 18 months the amount of gross outflow may have been as much as $300 billion. This, however, sounds more important than it is. It certainly does not point to anything as dramatic as a Chinese collapse.
It is no surprise that capital is jumping around the globe, including China. A financial shock starting in the U.S. coupled with persistent uncertainty in Europe and elsewhere will inevitably cause such movements.
Chinese policy has encouraged more movement. China has switched back and forth from slowly revaluing the RMB against the dollar to preventing its rise. During this period, it has also applied strict property controls.
This is already a powerful incentive for money to move, but more so when global rates of return have been pushed down by loose policy almost everywhere. As a result, storing money in Chinese property and gaining from RMB appreciation has been very lucrative at times. At other times it has been difficult and unappealing, and money has quickly left to seek higher returns.
The final fact to consider is that even the maximum $300 billion is small potatoes. China’s official foreign exchange reserves were $3.3 trillion at the end of September. China’s broad money supply is over 90 trillion yuan (over $14 trillion). In terms of Chinese participation in money markets, $300 billion is not that much. What’s going on is neither surprising nor obviously important.
From where I’m sitting, there’s always a second question: How does this affect Congress? The Washington Post this week notes that the U.S. is less reliant on China to fund our budget deficits. True, but that’s primarily because our deficits are so large that only the Federal Reserve can come up with that much money.
We can say something more interesting by going beyond China and beyond Treasuries to other American securities. With just a little digging, the Department of the Treasury’s International Capital website shows the following:
It’s somewhat interesting that China and Japan switched places, but it’s much more interesting that the Cayman Islands (population 56,279) will probably soon pass both the $1 trillion mark and the U.K. to become the third-largest holder of American securities. Luxembourg, another very small country, is fifth, ahead of more likely suspects such as Germany and Canada.
The Caymans, Luxembourg, Bermuda, and other small economies are international financial centers, where money is held for tax and other reasons. As a result, it’s not clear who is investing in the U.S.
Chinese companies especially love the Caymans. It may be that true Chinese holdings of U.S. securities are much higher than they appear but are routed through offshore centers.
This may also solve the mystery of money leaving China in the past 18 months. Can up to $300 billion really leave and not show up elsewhere in the world? Yes, if it’s hidden in places that don’t report their finances. There’s a real mystery.