Chinese Start to Lose Confidence in Their Currency
HONG KONG — As the Chinese economy stumbles, wealthy families are increasingly trying to move large sums of money out of the country, worried that the value of the currency will fall and their savings will be worth less.
To get around the country’s cash controls, 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.
The practice is called Smurfing, named after the blue, mushroom-dwelling cartoon protagonists, and it is part of an exodus of capital that is casting doubt on China’s economic prospects and shaking global markets. Over the last year, companies and individuals have moved nearly $1 trillion from China.
Some methods are perfectly legal, like investing in real estate elsewhere, buying businesses overseas, or paying off debts owed in dollars. Others, such as Smurfing, are more dubious, and in certain cases, outright illegal. Chinese customs officials caught a woman last year trying to leave the mainland with $250,000 strapped to her chest and thighs and hidden inside her shoes.
Graphic | China’s Exodus of Capital As the economy stumbles, individuals and companies are pulling money out of China en masse, leaving the government scrambling to limit the outflows.
If the government cannot keep them from rushing to the financial exits, China’s outlook could darken. The swell of outflows is a destabilizing force in China’s slowing economy, threatening to undermine confidence and hurt a banking system that is struggling to deal with a decade-long lending binge.
The capital flight is already putting significant pressure on the country’s currency, the renminbi. The government is trying to prevent a free fall in the currency by stepping into the markets and tapping its huge cash hoard to shore up the renminbi. But a deep erosion of those reserves can set off further outflows and create turbulence in the markets.
China is also trying to put the brakes on outflows, by tightening its grip on the country’s links to the global financial system. The government, for example, just started to clamp down on people’s use of bank cards to buy overseas life insurance policies.
Such moves have trade-offs. The limits create concerns that the government is pulling back on reform efforts that China needs to keep growth humming in the decades to come. But the near-term pressure also requires serious attention, given the global shock waves.
“The currency has become a very near-term threat to financial stability,” said Charlene Chu, an economist at Autonomous Research.
Navigating such problems is fairly new for China.
For years, China soaked up much of the world’s investment money, as the economy grew at annual rates in the double digits. A largely closed financial system kept China’s own money corralled inside the country.
Now, with growth slowing, money is gushing out of the country. And the government has a looser grip on the spigot, because China dismantled some currency restrictions to open up its economy in recent years.
“Companies don’t want renminbi and individuals don’t want renminbi,” said Shaun Rein, the founder of the China Market Research Group. “The renminbi was a sure bet for a long time, but now that it’s not, a lot of people want to get out.”
Managing the situation has proved complicated for the government.
China abruptly devalued the renminbi by 4 percent last August, as part of a shift to a more market-oriented approach and to help exporters. But that surprise move set off sharp stock falls.
The government then tried to guide the currency down in quieter fashion, with the renminbi falling 2.8 percent over a five-week period ending in early January. Even so, the stealthy move led to a sell-off, as global investors fretted about the Chinese economy.
The Chinese central bank is fighting the downward pressure by purchasing large sums of renminbi, selling dollars from its currency reserves to do so. China’s reserves sank by $108 billion in December and another $99 billion in January, to $3.23 trillion. A year and a half ago, they stood at $4 trillion.
And the renminbi still faces plenty of headwinds.
The government has been cutting interest rates to stimulate the economy, making it less attractive for savers to keep their money in the country. Corporate profits are shrinking because China has too many spare steel mills, car factories and empty houses, leading investors to seek better returns elsewhere.
Ronald Wan, a Hong Kong money manager who is on the boards of numerous state-owned enterprises in mainland China, said that pessimism was becoming the consensus. “Among the companies I have been in contact with,” he said, “all of them have the intention of moving money out of the country.”
In this environment, many banks and economists expect another sharp devaluation this spring. But the Chinese government has denounced predictions of any further erosion of the renminbi. The People’s Daily, the state-owned newspaper, in late January criticized George Soros, the billionaire trader known for big currency bets, after he questioned Chinese policies.
“When they came out to attack Soros, to me that was the strongest signal that they will do whatever they can not to make Soros and other hedge fund managers too rich,” said Weijian Shan, chief executive of PAG, a private equity firm based in Hong Kong that manages $15 billion.
The government’s next move, in part, will depend on whether it can stem the outflows, or at least slow them significantly. And in China, it is a bit of a cat-and-mouse game.
Individuals can move $50,000 a year across China’s borders. Companies and sophisticated investors have more freedom to send out money legally for big-ticket purchases and investments. Overseas and domestic companies, which maintain bank accounts in various currencies, can also shift their cash , as well as borrow based on which currency they think will fall in value.
Unofficial methods abound.
Companies have inflated trade invoices to keep more profits outside the country, although Chinese authorities have cracked down on the practice.
Mr. Rein described doing market research with a wealthy woman in Shanghai who changed $7 million this winter from renminbi into dollars, by using 140 relatives, friends and even friends’ relatives who each carried $50,000 a piece.
The government, though, is trying to cut off some routes.
Two years ago, the government gave permission for insurers to invest 15 percent of their assets overseas, up from 1.5 percent. But China abruptly told insurers this winter to suspend many of their overseas plans, according to Hong Kong financiers.
Beijing has restricted the withdrawal of renminbi from overseas branches of Chinese banks. In Shenzhen, banks have begun requiring that residents make reservations up to a week in advance if they want to change the daily maximum of $10,000 worth of Chinese currency into dollars.
In January, Zou Tai, a hospital worker from east-central China, caught an early morning flight to buy a $50,000 life insurance policy in Hong Kong. Scores of Chinese customers have been doing the same to get money out of the country, since the policy is bought in renminbi and can be cashed out in American dollars.
“The buying power of the renminbi keeps dropping,” Mrs. Zou said. “I feel that China’s leaders will have no choice but to devalue the renminbi.”
Mrs. Zou acted in the nick of time, since the government is now pushing back. UnionPay International, a government-controlled bank card company, recently announced that it would start strictly enforcing a pre-existing but widely ignored limit on overseas insurance purchases of $5,000 a year per card.