Chinese banks bought in January 140 bn RMB worth of foreign exchange, but despite this hiccup, money leaving China is the real challenge for its banks, writes financial expert Victor Shih in the Financial Times.
In previous years, exporters and investors used every loophole to sneak dollars into China, resulting in much larger flows into China than normal trade and investment activities would have predicted. The data from the past few months, including the January data, suggest that they are no longer doing this.
In fact, they are moving money out of China, or least out of the RMB. In a sense, China’s technocrats, who have fought hard to slow the inflow of “hot money,” have succeeded in shifting investor sentiment. After years of nominal and real revaluation (via higher inflation in China), the renminbi is no longer seen as a one-way bet, and the flood of money into China has suddenly dried up.
Yet, the journey ahead for China’s central bankers will be just as challenging as during the years of large inflows.
Instead of controlling the flood of new money coming into China, central bankers now must guard against a sudden and large withdrawal of liquidity from the banks, which may prevent banks from making needed loans in support of economy growth.
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