Monday, September 21, 2015

FX: Money Flowing Out Of China ~$4 Billion Per Day

We were going to post on this ZeroHedge piece last Thursday:
China Outflows Said To Surpass A Staggering $300 Billion In Under Three Months
but you got lucky, David Keohane put something together.

From FT Alphaville:

Of Chinese capital outflows, tighter capital controls… and baccarat

When your correspondent visited pawnshops in Macau this week and asked whether they could help him shift 1m yuan ($157,000) out of China—three times what one can legally withdraw in a year—most demurred.
- Anon (ish), Economist, Sept 19
Sad really to see them in such decline, even if said correspondent did find a brave few who would help.
Nervous times is the headline reason for their nervousness, what with all those police raids and a general chill redescending along China’s capital-borders as flows out of the country continue to make the government nervous — even if some of the headline outflow (a record of over $150bn or so in August according to estimates) is probably just dollars being hoarded by Chinese corporates, it’s very clearly a point of stress for China’s leaders.
Which is fair when you consider what it would mean for Chinese reserves if it chooses to absorb the capital outflows and what it means for the CNY if it doesn’t.
But before we get to that, it might be worth noting that those pawnshops were carrying most of the Macau-based capital flight risk.
Or at least that’s what Sanford Bernstein’s Parker and Umansky think in opposition to the more general idea that the casinos themselves and the junkets they organise are a way to spirit cash out of China (with our emphasis):
Junkets and, to a larger extent, Macau’s casino system, is not a preferred or economical way to transfer money out of China.When an individual transfers money through the junkets, they would be compelled to at least gamble with the money (that way, junkets get their commission), or pay an equivalent service fee outright to junkets. There is an inherent risk of gambling loss underlying this process and we believe it far exceeds the normal cost of using underground banks to transfer money out of China. When money flows through casino or junket system, we estimate that it results in an average loss of 20-25% of the original capital, which is significantly higher than the transaction cost of 2-5% through underground banks. In addition, if a VIP player were to redeem large sum in cash in HKD, their junkets would generally pressure them to use the HKD to offset the RMB debt they owe (to junkets) in China. In short, we do not believe junket system is an effective or economical way to transfer large sum money out of China.
Based on our on-the-ground check, junkets themselves rely on China’s underground banking system to transfer money (note that junkets tend to have an imbalance between RMB in China and HKD in Macau, and therefore, also need to move money across the border). Junkets often ask their VIP customers to transfer money to their account in HK/Macau via underground bank accounts. From an anecdotal point of view, Macau’s junket system utilizes, instead of creates, the underground banks. Certainly, we do not rule out the possibility that junkets also operate some fund transfer across China’s border, but we do not believe it is of systemic scale that overrides their primary function of scouting and servicing VIP gamblers.
So, yeah, those junkets are about to have a harder time while Macau looks like less of a risk to China’s capital outflow. Even if, as voluminously mentioned, capital flight more generally definitely isn’t with the classic (and some less classic) routes — multiple transfers of FX deposits by individuals, cross-border arbitrage and capital leakage through the current account for example — still ticking along.