Why Money Is Pouring Out Of China
RENEE MONTAGNE, HOST:
China used to have a booming economy. Now money is rushing out of that country. Last year, Chinese people and businesses sent an estimated $1 trillion overseas, and that's forced China's government to spend a fortune, trying to prop up the value of the currency, the renminbi. What's happening? What does it mean for the rest of us? NPR's Frank Langfitt is on the line from Shanghai to help explain. Good morning.
FRANK LANGFITT, BYLINE: Good morning, Renee.
MONTAGNE: This is a big change. When did people start sending so much money out of China?
LANGFITT: Well, people have been diversifying their assets here and investing abroad for a while, but last year, the floodgates really opened. There are a couple of reasons for this at least. Growth, of course, is continuing to slow here. But for the first time, also, people have real doubts about the economic leadership of the country, and there's worry if the currency loses more value their assets are just going to decline more.
MONTAGNE: Well, have you been able to talk to people in companies also who have been sending money out?
LANGFITT: Yeah, actually, it was very easy. I was at a luxury mall this week in the financial district. I met a guy named Brennan Cao. He's 25. He used to work in private equity. And last year, he said the company that he was working for, they set up funds in the Cayman Islands, and they sent 40 percent of their assets there. And the reason was just like we were talking about, worried that the renminbi was just going to keep losing value.
BRENNAN CAO: (Through interpreter) In the past, they invested all their assets in renminbi. But since last year, they started investing in assets denominated in U.S. dollars. Altogether, they moved out $60 to $70 million. In Shanghai, mid and large private equity firms are all reallocating their assets like this.
LANGFITT: Yeah, so, Renee, of course, China does not want this money pouring out like this for sure, so it only allows each person with a government ID card to change $50,000 worth of renminbi into dollars each year. And so I asked Brennan this.
LANGFITT: Is it hard to move the money?
CAO: Not that hard.
LANGFITT: How do you do it?
CAO: You just get more ID.
LANGFITT: So the way it works is you borrow the ID cards of, say, 10 family members and friends, and you can move half a million bucks out of the country. Of course, it's not just private equity firms. Lots of people are doing this. Now that's what Xu Bin says. I was talking to him earlier this week. He's a finance professor at China Europe International Business School here in the city.
XU BIN: One of my MBA students who graduated about five years ago, he told me that he has already converted almost all his renminbi to U.S. dollar.
LANGFITT: And Xu says this guy works in finance, and he's been living off his salary and just $3,000 in savings in renminbi.
BIN: Of course, he's probably a extreme case, but that signals, you know, the mindset of Chinese wealthy people.
LANGFITT: So as growth is slowing here, Chinese like Xu's former student, they're sending more money overseas. Basically, (unintelligible) they're hoping for better returns, and reason for that is the old industrial economy, as we have been talking about for a long time, has been running out of gas here. And Xu says the government's working really hard to try to build a new model.
BIN: The Chinese economic situation has changed fundamentally. Therefore, China is now in the very difficult transition period.
MONTAGNE: And Frank, let me get in here. A transitional period, how's that going?
LANGFITT: Not so well, actually, the government's been stumbling in a way we haven't seen before, honestly. Back in August, China suddenly devalued the renminbi. It freaked people out, not just here in China. The Dow dropped more than 200 points. The government also has mismanaged the stock markets, which crashed last year. This is a big change. Xu says, you know, for the past two decades, officials here had a really good reputation for managing the economy.
BIN: That reputation was kind of lost last year, and I think the government has to now work very harder to restore certain confidence.
LANGFITT: Without that confidence, the renminbi could fall even farther. I was talking to a guy named Liu Li-Gang. He's chief economist for Greater China at ANZ. It's an Australian bank. And he says a cheaper renminbi is, of course, going to make it a lot more expensive for China to buy imports.
LIU LI-GANG: As a result, demand from China, the second largest economy in the world, will decline.
LANGFITT: And of course, that could make it tougher for businesses and economies all over the world. And of course, if you have a stock portfolio, you're probably going to feel that.
MONTAGNE: Frank, very, very interesting, a little bit frightening, where do people think the renminbi is headed?
LANGFITT: Different opinions as you would imagine, hedge funds - a number of hedge funds, they're shorting the renminbi. They're betting they can make money if it keeps falling, China's central bank insisting that they're going to keep it stable. But to do that, the government here keeps having to spend a ton of money to buy up renminbi to prop up the value, last month, estimated $90 billion they had to spend. Now China still has huge foreign currency reserves, more than $3 trillion, but they can't keep spending like this forever.
MONTAGNE: OK, well, Frank, thanks very much.
LANGFITT: You're very welcome, Renee.
MONTAGNE: That's NPR's Frank Langfitt speaking to us from Shanghai.
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