Check out the following:
China has a near-record trade surplus.
China’s foreign exchange reserves have barely risen.
Chinese banks are borrowing RMB to buy USD.
The South China Morning Post published an article on February 3, 2021, attempting to make sense of the above three incongruous developments.* Alas, the SCMP failed to square the circle. Geometrically, we can’t square a circle. Neither can we economically.
China’s trade windfall should have enriched its foreign exchange reserves phenomenally, but nothing like that has happened. Why? According to the SCMP, it is because China has to temper excessive RMB appreciation by allowing a net capital outflow. Ah, no wonder USD is appreciating as of this writing. See, China is telling the world that it doesn’t bet against America. A friendly gesture to the Biden administration? Wall Street would like you to believe so. Do you believe so?
Why doesn’t Beijing keep more money to meet urgent and mounting domestic needs? How about putting money in people’s pockets to stimulate consumption? Last time I checked, ordinary Chinese were starving for financial relief, much as, if not more than, ordinary Americans and Europeans were.
I hate to spoil the fun, but I don’t see a depreciation of RMB in the offing. Interestingly, the People’s Bank of China is asking Chinese commercial banks to buy USD when they don’t have much RMB themselves. To buy USD, Chinese commercial banks have to borrow RMB from the PBoC. What is going on?
China is known for its opacity, but clearly there is a net capital outflow from China in spite of its huge trade surplus and pressing domestic needs. That is not good news to ordinary Chinese.
--- by Lingyang Jiang
*https://t.co/huPjavg37f?amp=1
