Fleeing Weak Yuan
Jan. 25, 2017
Chinese businesses and investors are concerned about the weakening yuan. Many of them are hurrying to move their money offshore, and authorities scrambling to stop them.
Chinese officials are struggling to keep the value of the country's currency under control. The yuan fell nearly 7% against the dollar last year, adding to worries about the economy.
One of the gateways for the massive outflow of funds from mainland China is Hong Kong. Chinese investors worried about their money losing its value have confidence in the Hong Kong dollar because because it’s pegged to the US currency.
A mainland conglomerate bought one chunk of land for double the price of nearby properties. Other Chinese companies have been spending billions to buy buildings like this one. Analysts say mainland investors are involved in the majority of top-level real-estate transactions in the city.
Regular people are following suit as a loss of confidence in the yuan spreads. Gao Yan works as a manager at a state-owned company. She says she’s worried about the future of China’s economy, so she went to Hong Kong to buy a US dollar-based insurance policy.
It costs her about 20,000 dollars a year, and she expects solid returns with the product, feeling safer moving her assets offshore.
"I’m worried the yuan will fall," she says.
Since the yuan started weakening in 2015, people on the mainland have been scrambling to buy insurance policies in Hong Kong. Odyssey Cheng sells these products to his clients, and he thinks Beijing officials will have a tough time stopping the leak of funds despite their efforts to tighten regulations.
"Foreign currency investments are strictly controlled. Individuals have few options but financial products in Hong Kong," Cheng says.
Last year, to crack down on the practice, the Chinese government began enforcing a 5,000-dollar limit on debit card payments for Hong Kong insurance products. But there were no restrictions on the number of payments and people exploited the loophole by making payments repeatedly, so the government hit back by banning the practice.
Cheng isn't discouraged though because he has managed to find another way to get around the restrictions.
"I'm a little concerned, but the policies change every day," he says.
Cheng tells his clients that instead of using debit cards, they can pay in cash.
As the government enacts new regulations, and people find ways to get around them, the currency is under pressure, and so is the economy.
NHK's Hong Kong bureau chief Takuma Yoshioka joins anchors Aki Shibuya and Sho Beppu in the studio from Hong Kong.
Shibuya: If the yuan capital outflow continues, what kind of damage would it bring to the Chinese economy?
Yoshioka: If the yuan keeps being sold and moving out of China, its value will continue to fall. If it goes too quickly and too much, it would deteriorate China’s already slowing economy. For example, big Chinese companies and banks have a large amount of dollar debt. Official statistics say it comes to 680 billion dollars. If the yuan depreciates 10 percent, their debt expands 10 percent. That would make it difficult for them to pay back their debts. Sharp depreciation can also cause raising cost on import goods, and that would affect ordinary peoples’ lives. A stable currency rate is a key to sustaining economic growth.
Beppu: The new US president, Donald Trump, often criticized China as “a currency manipulator” during his campaign. Now that he is in office, how will that influence the Chinese economy?
Yoshioka: President Trump’s tough stance regarding China on trade issues seems unchanged. He actually looks even more determined since the inauguration. This brings a big amount of uncertainty to this region. Analysts in Hong Kong say, if not a trade war, trade frictions between US and China on certain areas will be unavoidable.
Tackling capital outflow internally, the Chinese government is going to face another external pressure. This is totally unwelcome, especially when the Chinese leadership is going to have a very important political event late this year, the National Congress of the Communist Party.
Beppu:So how is the Chinese government going to handle economy before the National Congress?
Yoshioka: Top priority of China’s economic policy now is stability. They want to avoid any instability in the market that would raise peoples’ complaints and eventually lead to criticism of the leadership. So the government is now trying to stop the capital outflow by enhancing regulations.
But a person from the insurance industry says the more the Chinese government tightens its grip, the less trust Chinese people put in their economy, and that pushes capital outflow even further. Facing both internal and external pressure, it is becoming more challenging for the Chinese government to handle its economy.