China’s rich seek ways to move cash abroad before yuan weakens

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No news here. China’s rich have been doing this for years. Particularly the ultra rich. A combination of fleeing overcrowding and pollution, running from crackdowns on corruption, and avoiding debasement of their wealth by China’s central bank. I don’t know how true this is *now*, but in the past when US company A had Chinese company B make something, company A would pay in USD. Company B doesn’t need USD, they need RMB, as this is what they need to pay taxes in China. So they deposit these dollars in a bank and get them changed out for RMB. In a fair trading environment, the commercial bank goes to the Forex and exchanges USD to RMB. Over time this leads to more demand for existing RMB, and oversupply of USD in the Forex. RMB value goes up, USD goes down, and any trade imbalance would naturally smooth out over time. This is not what was happening. What the China CB would do is have the commercial bank hand the dollars over to them, and print new RMB to give to the bank, who gives it to the customer. This debases the Yuan, and help keeps the trade imbalance going. US companies get to keep high margins and take advantage of wage suppression, China gets to keep a massive trade surplus. To top it off, China’s central bank would use these dollars to buy treasuries. So the US govt. got to keep spending more than it had as well. It was win/win for everyone but US labor and main street. (Who got cheap shit in return). But…the other losers not talked about much are China’s rich and ultra rich, who got to see their fortunes debased. It was so bad China had to pass a bunch of laws to try and stop the flight of yuan and people to primarily USD, CAD, and Euros.


If the yuan weakens, which currencies will rise? The American dollar isn’t looking too strong, nor is the Euro. Are we seeing the beginnings of an inflationary spiral? Some say it’s intentional, a way to wipe out overwhelming debts.


The main problem is that the Chinese real estate market is overpriced and the Chinese financial system does not offer any other competitive investments. I’ve been trying to invest in China for years to improve my diversification but the assets available just aren’t that great. The lack of good assets available on the market means that the few good assets are bid up to crazy valuations. There is way too much savings chasing way too few good assets. Real estate yield is like 1-2%, which is lower than interest rates. The big problem is the giant state corporations control the best assets, and they are not terribly shareholder friendly. They have a dual mandate of profits + social responsibility. So a lot of the economic surplus from the SOEs do not go to shareholders, they end up benefiting average Chinese citizens instead. For example, the state owned telecoms (traded in HK) are mandated to build out nation wide 5G. This is insanely expensive and capital inefficient. A 5G tower serving some remote mountain village will never generate enough revenue to pay back its capital costs. In contrast, American companies are generally pretty shareholder friendly. All the surplus cash goes to stock buyback and dividends. None of it is wasted on building out infrastructure to serve poor people who can’t afford to pay enough fees to generate a reasonable return on investment. This is a problem with the Chinese system that is in conflict with the goal of maximizing return on capital.


What will happen if the American dollar and the Chinese yuan collapse at the same time?


China wants the yuan to weaken though and this has always happened. The more rich that invest in other currencies helps them as well to keep their trade balances.