China Economy

How a Shanghai white-collar worker is joining frantic scramble to shift cash overseas as yuan hits seven-year low

Analysts question whether Beijing can realistically stem the flow of money abroad as people look to safeguard the value of their investments

PUBLISHED : Tuesday, 15 November, 2016, 10:39am
UPDATED : Tuesday, 15 November, 2016, 11:23pm

Simius Zhang, a white-collar office worker in Shanghai, is determined to safeguard his family assets as China’s currency weakens.

Believing the yuan will continue to depreciate in the coming years, Zhang is maximising every possible channel to move his wealth into assets denominated in other currencies.

When China UnionPay – the state-backed payment services provider – banned the use of its clearing system for bank cards for buying investment-grade insurance policies in Hong Kong, the 36-year-old couldn’t help but give himself a pat on the back.

UnionPay bans mainlanders from using card to buy insurance investment products in Hong Kong

He had already bought three dollar-denominated policies in Hong Kong for his family at the end of last year, ahead of the latest move by Beijing to restrict the flow of cash out of the country.

He has already used up most of his US$50,000 annual quota for purchasing foreign exchange for 2016 and he will rush to buy dollars once the new quota is available in the new year. Every Chinese resident is allowed to purchase up to $50,000 worth of foreign exchange a year, according to China’s foreign exchange rules. Any amount above that requires special regulatory approval.

Zhang, however, said he was not just relying on shifting money offshore to mitigate against the falling value of the yuan.

“Simply by changing yuan deposits into dollar deposits, I can gain an annual return of four or five per cent” as he expects the yuan to weaken further against the dollar in 2017.

China’s government has been trying with limited effect to deal with the impact of a weakened currency and the threat to the country’s financial stability of this rush to move cash out of the country.

China’s foreign exchange reserves have fallen by US$873 billion since their all-time high in June 2014 — and the decline is continuing.

It’s a continuing trend that residents are having more incentives to diversify to US dollar assets
Claire Huang

The reserves fell by US$46 billion in October, the largest monthly fall since January, but the dip in reserves only measures part of China’s capital flight. Chinese residents are moving yuan assets abroad as well.

The exchange rate for yuan against the dollar traded within China broke the key level of 6.8 last Friday.

It came four and half months after the People’s Bank of China issued a strongly-worded statement denying a Reuters report which cited unidentified sources as saying that the Chinese currency would weaken to 6.8 against the greenback by the end of the year.

The yuan also continued its lacklustre performance against the US dollar on Monday.

Its central parity rate dropped to 6.8495 against the US currency on Tuesday, taking the Chinese currency to a seven-year low.

Claire Huang, an economist at Societe Generale in Hong Kong, said the Chinese currency was likely to weaken further against the dollar in the coming months.

“It’s a continuing trend that residents are having more incentives to diversify to US dollar assets even if not necessarily transferring the money out of China,” she said.

Disappointing exports and fast capital outflows drive yuan towards six-year low

Lin Caiyi, chief economist at Guotai Junan Securities, said it was increasingly China’s middle-class, such as Zhang, along with the super rich who were “diversifying” their wealth abroad.

“Just like consumption upgrading, there is also a similar wealth management upgrading as more and more Chinese have the global perspective and channels,” she said.

She noted that around the world there was trend towards investing in US assets as the greenback was still viewed as strengthening in value.

The unprecedented exodus of funds from China is having a ripple effect on overseas markets.

Even though only a small fraction of China’s 59 trillion yuan (HK$67 trillion) worth of household deposits are leaving the country, it is a huge amount of funds that can cause swings in markets.

Hong Kong, usually the first stop for money leaving the mainland, was forced to double its property stamp duty to 15 per cent to cool off the property market heated by mainland money.

Goldman Sachs warns China’s currency outflows may be worse than they look

Danny Po, Asia-Pacific mergers & acquisitions tax leader at Deloitte, said Chinese companies preferred commercial real estate projects in major economies on the expectation of stable returns from rentals. They also view this as a safe class of investment, he said.

“Capital assets investment could be much more volatile,” he said, noting that New York, Los Angeles, San Francisco and London were popular destinations for mainland firms’ cash.

Rotterdam-based Robeco opened a wholly-owned subsidiary in Shanghai this month as the asset management firm seeks to tap rising demand from high net-worth Chinese to invest overseas.

[The Chinese] see the UnionPay step as a signal of tighter control from Beijing and a herald of further devaluation of the yuan ... So they swarmed to Hong Kong swiftly to buck the trend pictured by the authorities.
A Hong Kong insurance agent

Michael Lu, managing director of Robeco’s China subsidiary, said he foresaw persistently strong demand from China’s wealthy to allocate assets overseas over the long term despite some temporary foreign exchange restrictions now.

“We believe China will continue its opening policy and we have full confidence in full yuan convertibility in the long run,” Lu said.

The authorities have tightened scrutiny of capital outflows for fears that sudden capital flight could shake the nation’s financial stability.

These measures include halting the granting of new quotas for qualified domestic institutional investors. Data released last month showed that China’s foreign exchange regulator has not issued any new quotas under the legal channel for institutional overseas investment since December.

The regulator is also carrying out more stringent checks on the authenticity of outbound direct investment deals. The approval for qualified domestic limited partners, another legal channel to take money abroad, has also been halted.

Beijing’s efforts to prevent capital outflows could, however, backfire.

An agent in Shanghai, who helps rich Chinese emigrate, said many of his clients were willing to pay commission as high as two per cent to move money overseas.

Other were using their connections abroad to skirt capital controls, the agent said, who declined to be named because he was not authorised to speak to the media.

Yuan declines as traders fear capital outflows to accelerate

An insurance agent in Hong Kong said UnionPay’s step to limit investment had actually helped improve his business.

Clients want to pay swiftly for insurance and investment products, through Visa, MasterCard or cash, ahead of any further restrictions from the authorities.

“They see the UnionPay step as a signal of tighter control from Beijing and a herald of further devaluation of the yuan,” he said. “So they swarmed to Hong Kong swiftly to buck the trend pictured by the authorities.”