When Federal Reserve Chair Janet Yellen testified before the House Financial Services Committee last week, she made no bones about the fact the Fed is keeping an eye on economic developments in China and evaluating the ways in which changing circumstances in the country, including currency devaluation, could affect global growth and the U.S. economy.
Yellen is not the only one worried about currency devaluation in China. The New York Times reported Chinese companies and wealthy citizens have been pulling money out of the country because they’re worried the purchasing power of their savings will decline significantly if the government further devalues the renminbi. Some have been using renminbi to invest in real estate abroad, buy overseas businesses, or pay off dollar-denominated debt.
Others have been avoiding China’s capital controls, which are measures designed to regulate flows from capital markets, by engaging in ‘smurfing.’ The New York Times described the practice of smurfing this way, “…Individuals are asking friends or family members to carry or transfer out $50,000 apiece, the annual legal limit in China. A group of 100 people can move $5 million overseas.”
According to the Institute of International Finance, cited by CNBC:
“The 2015 outflows largely reflected efforts by Chinese corporates to reduce dollar exposure after years of heavy dollar borrowing as expectations of persistent renminbi appreciation were replaced by rising concerns about a weakening currency.”
During the final six months of 2015, capital flowed out of China at a rate of about one trillion U.S. dollars annualized, according to The Economist.
Weekly Focus – Think About It
“Do not dwell in the past, do not dream of the future, concentrate the mind on the present moment.”
–Buddha, Religious leader