How China Almost Ran Out Of Physical Dollars

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On Tuesday, we weren’t surprised to learn that some banks in Shanghai and Beijing were apparently running short of physical dollar bills.

According to Ming Pao, Shanghai residents were lined up at local banks in a frantic effort to sell RMB for USD amid China’s ongoing yuan deval.

“Some banks in China’s Beijing, Shanghai and Shenzhen ran short of dollar bills for cash withdrawal amid increasing demand for the currency,” 21st Century Business Herald added, citing a reporter’s investigation which showed that “BOC, CCB, and China Merchants Bank in the listed cities are requiring an appointment at least 2 days in advance for >$5,000 purchases.” The appointment “could take as long as 1 week at some branches,” the paper said.

Why the panic? Because, in the simplest possible terms, no one has any idea what Beijing’s target is for the yuan.

In fact, no one even knows if the PBoC has a target at all or if China is simply flying by the seat of its pants managing the glidepath on an ad hoc, daily basis depending on how wide the onshore/offshore spread is (a proxy for the pressure on the currency).

One thing seems certain though: a much bigger “adjustment” will be necessary if China hopes to stabilize its economy by propping up exports. As Deutsche Bank noted last week, if global currencies continue to slide against the dollar, the yuan will need to fall if China hopes to keep its new trade-weighted RMB index from rising.

As long as the deval continues in a kind of fits and starts fashion, the capital flight will continue. That is, the only way to stabilize the situation is to allow the market to decide where the yuan should trade once and for all, a painful option in the short run, but a move that would keep the country’s capital account from dying a slow death by a thousand paper cuts. As Morgan Stanley puts it, “the capital accoount [currently] dominates the current account.”

Now, as the turmoil continues (temporarily “better” trade data notwithstanding), WSJ is out with an account of how China is rapidly running out of physical dollars. “At major lender Industrial & Commercial Bank of China Ltd., one banker said the number of people wanting to change yuan for dollars has increased significantly during the past three weeks—a period during which the Chinese currency has declined about 2%,” WSJ begins. “During the weekend, ICBC received an urgent notification from China’s central bank warning of a dollar shortage, he said.”

ICBC customers are now subject to the same kind of waiting period described earlier this week by 21st Century Business Herald. The bank is now requiring a four day advance notice on FX exchanges presumably in an effort to manage the flows and ensure the cash is available.

Chinese are only allowed to exchange $50,000 per year (although between the various “Mr. Chens” and end-arounds like the UnionPay ruse there are plenty of ways to circumvent the captial controls) and WSJ suggests the selling pressure may be particularly acute now because everyone is starting with a clean slate for 2016. “Since China’s strict capital controls limit Chinese consumers to purchasing $50,000 worth of U.S. dollars each calendar year, January is also when they can start buying again with a fresh quota,” The Journal continues, before quoting Harry Hou “who works in the financial industry in Shanghai, [where] he, his wife and parents bought their limit of $200,000 last year, and started buying dollars again through China Merchants Bank’s online service as soon as the New Year kicked in.”

“This year’s biggest market risk is not going to be [stocks] but the yuan. The government has let the yuan fall in the past, allowing it to weaken to 8 yuan from 5 yuan against the dollar in the 1990s,” Hou said.

And while Chinese authorities are doing their best to control the flow by cracking down on quota abusers and asking banks to make lists of those suspected of skirting the rules, the only way to stop the bleeding is to convince the market that the deval has nearly run its course. That won’t be easy, especially with the onshore/offshore spread blowing out, persistently lower nightly fixings, and a trade-weighted RMB that’s still substantially elevated from a historical perspective.

In fact, Chinese are so convinced that there’s more downside to come that exporters are executing a daily arb. “James Mao, who runs a Shanghai-based company that exports biochemical materials from China to the U.S., says he is asking Chinese suppliers to wait for a few days to get paid, since he thinks he can get more yuan for those dollars later,” The Journal explains. “Exporters are required to sell the foreign currency they obtain from trade to the central bank, but there are no rules on when the transaction needs to be done. So far this month, Mr. Mao says he pocketed an extra $2,000 by waiting longer to convert his dollars to yuan.”

Remember China, if the banks run out of dollars or if you find yourself having to wait a week for your greenbacks, there’s always Bitcoin.

And there’s always Chen.

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