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Hot Money Races Out Of China

CHina state-run media reported, RMB devaluation has led to the withdrawal of hot money. 2014-04-06 05:32 PM EST Last Updated: 2014-04-07 05:56 PM EST
This year, Renminbi (RMB) has dropped so badly that domestic housing, export, and production index have declined. Consequently, the dollars go out and local debts go up. The phenomenon is believed to be breaking the myth of the economic growth in China. China’s economy is taking a battering as expected by the economists. Three multinational banks have warned recently, China is likely to be the storm at the center of the emerging market.

Recently, U.S. Citigroup, Japan's Nomura Group, and Credit Suisse Group, have respectively warned that RMB devaluation, may have a reverse affect upon hot money (the flow of funds).

This year, the RMB exchange rate has hit the record low, at a 2.6 percent decrease in a quarter. The Communist mouthpiece Xinhua News Agency reported, RMB devaluation has led to the withdrawal of hot money. It is said that some foreign investors are leaving China as they did not believe their would be a rebound within the Chinese market, and also due to the unilateral depreciation of RMB.

In financial markets, hot money is also known as refugee capital, or speculative capital. Hot money investments are mainly in foreign exchange, equities, and funds. They can move very quickly in and out of markets.

Xinhua reported, offshore yuan investment in mainland China has dropped in most of March in the past nine months. Of the 14 major companies assessed, there was a reduction of 5.3 billion yuan (US$ 850 million) in March, the sharpest decline since money shortage in last June.

Economists hold different views about the RMB devaluation. Some believe that the Chinese economy is in recession, with weakening in exports and yuan. Others believe, central bank deliberately weakened yuan to restore the export competition.

Rex Zhou, New Assets Investment Advisors founder: "A lot of money went in to the system, believing in the strength of the yuan, hoping to earn quick interests. After the devaluation of yuan, pressure starts to mount upon some of the products. The devaluation of yuan has become a double-edged sword. It helps the exports, but also causes capital outflow."

Prior to the 1997 Asian financial crisis, Southeast Asia also experienced continued depreciation of the currency, followed by weakening exports and currency evaluation, and subsequently led to capital outflow. According to Communist China Customs statistics, China's exports fell 20.4 percent in February, a trade deficit of 139.79 billion yuan, compared with a surplus of 93.43 billion yuan from last year.

In addition, HSBC Bank of China, showed China’s purchasing managers index PMI,
had declined to below 50 for three consecutive months and continued to remain low, indicating a slowing down in China's economy.

Financial expert Rex Zhou believes that economic failure in China, is most likely due to mass printing of RMB during the global financial crisis in 2008.

Rex Zhou: "The supposed layoffs and factory closures were saved by the mass printing of RMB, lasting for a good couple of years. But now the problems are surfacing. I believe it is more of an issue caused by the monetary policy
during the 2008 financial crisis, not necessarily due to the withdrawal of the Fed’s reserve."

Citigroup’s latest report, told clients to brace themselves for a second phase of the "taper tantrum", which rocked emerging markets last year, this time, with China at the eye of the storm.

Gong Shengli, Chinese financial think tank researcher: "The capital outflows and stressful currency situations, may have to continue for some time. It may be the toughest in August as it is getting close to the complete withdrawal of Fed’s monetary policy, quantitative easing (QE), in October."

Mr. Cheng, anonymous Chinese economist: "History does not develop according to the will of an individual or a group. The biggest problems in China’s financial system, are that it is not fair and it is not open. When the development is getting more narrow and restricted by discrimination and suppression, it is only wise to escape."

The Chinese Sina Finance Website analyzed last July, that more than one trillion yuan (US$160 billion) of foreign investment, might have withdrawn from China.

Visiting Professor for Institute of International Economics, Nankai University, Liu Shan, argued that hot money outflow will break China’s economic bubble economy, affect the process of RMB internationalization, and push the Chinese run on the dollar, causing further devaluation of yuan and dollarization of Chinese assets. The consequence of the bubble bursting and the dollarization of Chinese assets, is the deflation of currency.

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