The End of China's Boom

(Chart courtesy Calafia Beach Pundit)

(Chart courtesy Calafia Beach Pundit)

Scott Grannis writes that foreign investors aren’t buying into China like they once were:

As the chart above shows, China has been buying foreign currency (thus increasing its holdings of foreign currency) for most of the past two decades, AND it has been allowing its currency to appreciate. Until recently, China has been the beneficiary of massive net foreign investment inflows—so massive that even $5 trillion of forex purchases by the Bank of China weren’t enough to stop the yuan from appreciating.

The Bank of China now holds about $4.7 trillion of forex reserves. However—and this is critical—China’s forex reserves have not increased over the past 18 months, and have actually declined by about $300 billion since last summer. This means that China is now experiencing net outflows of currency, and that in turn is a sign that China is no longer a magnet for capital. Foreign investment is no longer flooding into the economy because the opportunities for excess returns in China have diminished significantly. The bloom is off the Chinese rose.

I can’t find it in the archives, but I blogged a story years ago about a conversation between (I think) President George W Bush and (I think) Chinese Premier Hu Jintao. Bush had told Hu that the US economy needed to generate 2 million jobs a year or he’d be out of a job. Hu replied that the Chinese economy needed to generate 25 million jobs a year or there’d be a revolution.

The good news is that Beijing still has that $5 trillion in the bank, which is enough to paper over a lot of problems, and for quite a while.

But what happens if the money runs out?