China’s $1 Trillion Money Exodus Isn’t About Capital Controls

01/28/2016 at 3:43 |

Last year, Chinese policy makers watched $1 trillion in capital head for the exits. Now, the question on the minds of global investors is what exactly will President Xi Jinping’s economic team do about it.

One option is to build a wall around the $10 trillion-plus economy with new and comprehensive capital controls. It’s the economic equivalent of breaking the glass and pulling the alarm–and some serious people are advocating it. One is Bank of Japan Governor Haruhiko Kuroda, who turned heads at the talking salons of Davos last week when he urged China to impose capital controls to stem the flow of cash leaving.

China has been getting a lot of unsolicited advice of late. Its trading partners, including Japan, and commodity producers the world over have a big stake in China’s smooth transition from a high-speed export economy into a more sustainable one anchored by services and consumer spending.

Yet the transition isn’t easy. China is growing at its slowest pace since 1990, and its domestic stock markets in Shanghai and Shenzhen have experienced massive and renewed sell-offs in January that have destroyed $1.8 trillion in wealth. Nor are there any quick fixes for authorities, who already have strict rules in place on money flows.

“There’s not much China can do, short of actually halting overall trade,” said Andrew Collier, an independent China analyst and former president of the Bank of China International USA.

The capital exodus is also a reflection of better investment opportunities abroad, and that’s not necessarily a bad thing — at least in moderation.

Last year, Chinese companies spent a record $61 billion on foreign acquisitions that could take them into new markets and move up the innovation ladder in coming years. This month, Haier Group Corp. announced plans to use its publicly traded arm in Shanghai to pay $4.5 billion for General Electric Co.’s home-appliance business.

Other types of capital outflows are less welcome: Sustained outflows can fuel deflationary pressures, be a drag on growth and weigh on asset prices from real estate to shares.

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