Victor Shih - The Dangers of Capital Fleeing China

A giant that shrinks when coming closer -- that's what Victor Shih sees when looking at China's three trillion dollars of foreign exchange reserves. Shih is Assistant Professor of Political Science at Northwestern University, and he tells us how China could run out of reserves pretty quickly in the event of a crisis.

Shih has collected data on banks and wealthy households in China, and he warns that the wealthiest 1% of households hold enough deposits in the banking system that if they start moving money out of the country, $3T could start to seem like a much smaller number.

Capital flight on the order of half a trillion -- that's no problem for China's banking system, Shih says, because China has the world's highest required reserve ratios, acting as cushion. But at around the $1T mark, the central bank would be forced into large-scale asset sales to avoid illiquid banks.

Enjoy the video and do spread these ideas around!

Comments

0

And where would this capital flee to: disintegrating Europe? crippled US economy? The issue is that there are no bigger paced to flee to: perhaps Australia, perhaps Canada, perhaps Africa (resources).

The comparison of the current innovative and entrepreneurial China to former Latin American predicaments is far fetched: these are very different societies and economies, lessons from such comparisons are very speculative.

Greetings from hot Toronto,

Val Samonis

0

Val, you make fair points. The main thrust of Shih's comments, though, is the fairly modest conclusion that wealthy Chinese households control enough deposits, and have ways to avoid capital-account controls, that if they decide to move money out of the country, it could erode the PBOC's foreign exchange position rapidly. In the interview, I tried to make a bigger connection to wider fragility in the Chinese financial system.

Whether such households do or do not decide to move deposits abroad is indeed speculative. But I think the barrier may be lower than you expect. Given that households are earning negative real interest rates on their deposits, and given the lack of alternatives within China, many foreign investments might be preferable.

0

RE: But I think the barrier may be lower than you expect.

And that is the crux of the matter re the difference of our views. I suspect that most Chinese believe that they are pretty much the only big and sustainable game in this global village of ours (some would contend that they already have the biggest GDP in stats terms); and they are in the game together and for the long haul. What I mean here that they do not subscribe to the Western quarterly earning reports idea; therefore, their capital might not be that easily moved (not any longer at least) as we in the West are used to conjecturing from our economic history and finance theory.

Thanks for your rebuttal!
val samonis

0

I couldn't disagree more.

The Yuan might be undervalued by 50% or more. China has all kinds of capital controls. China is also increasing its reserve holdings at something like $2-300 billion per quarter. Right now, trillions of dollars of capital *want* to flow in to china. At the moment, there is very nearly no chance that China's Foreign Reserves are "not enough" to fight off the shorts.

China should focus merely on solid banking regulations, and if they prevent domestic banking troubles with smart domestic banking regulations, there will be no foreign reserve crisis.

Shih is just a China-apologist. Why didn't he write his article instead about how dangerous it is that Canada or Denmark, or the US for that matter, have so little in foreign reserves? Why is China special in this regard? Obviously, Canada has well-regarded banking regulations, so doesn't need trillions in foreign reserves, so such an article would appear absurd.

China is manipulating its currency to get a trade advantage, not to stop people from shorting the obviously under-valued Yuan.

0

It's a huge assumption that china actually has money to move out.

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