China skeptics also get their figures wrong

As the yuan plunges below 5 1/2-year lows in the wake of Brexit, rumblings of a possible large devaluation on the order of 15 to 30 percent have returned. One particularly bearish hedge fund assessment reiterates the belief that a Chinese banking and currency crisis is already a foregone conclusion. As is often the case, such analyses seem to rely on erroneous figures, in this case the revised balance of payments (BOP) by China's State Administration of Foreign Exchange (SAFE):

The same accumulated BoP number today, revised by SAFE several times since, is now a deficit of about $2.8 trillion. Essentially, with its revisions, the SAFE has acknowledged even more capital outflows over the last 16 years than we had initially identified.

On the capital account side, there was a downward revision of $10.1 trillion – from a $4.2 trillion surplus to a $5.9 trillion deficit. On the current account side, the revisions show that Chinese exports have not been as strong as initially reported over the last decade and a half. China’s current account surplus has been reduced by $2.1 trillion– going from $5.1 trillion to $2.9 trillion over the last 16 years.

In fact, a quick look at the latest BOP spreadsheet (as of June 30) from SAFE's own website yields a far lower capital account deficit from 2000 thru 2015 of only $2.43 trillion, which combined with a current account surplus of $2.91 trillion and net errors and omissions of $483.67 billion over the same period yields a miniscule $87,136,500.00 accumulated BOP deficit for the last 16 full years (2000-2015, excluding 2016 Q1). That's a far cry from the hedge fund's dire calculus of a nearly $3 trillion deficit for what was indisputably the unprecedented global expansionist phase of China's reform and opening.

In fact, there's no question that the yuan has been overvalued for some time, that this has mainly been driven by chronic capital outflows dating back much longer than the Fed's monetary tightening cycle which began in 2013, and that only in the past year (the stock market crash was exactly a year ago this week, and led to the currency devaluation five weeks later) has the scale of this problem become widely known. But the aforementioned capital outflow figures are an example of how easy it is for the bearish arguments to go as far off the mark as the bullish ones. Either they're using entirely different figures or their arithmetic is way off.

Back in the real world, PBOC is now fairly confident that it can guide the RMB down 4.5 percent in 2016, to 6.8 per dollar, without triggering much international turmoil should such easing prove necessary to boost the economy and exports particularly. The key is to maintain control of this depreciation at all times. It has already been covering up capital outflows to the tune of $170 billion since October through derivatives and offshore forex interventions via its affiliated state banks, allowing the yuan to maintain an artificially strong peg to the dollar far longer than if its offshore market weren't so heavily manipulated, especially since the near-total run on it in January forced PBOC's hand in the Hong Kong money markets.

The verdict is still out on whether Beijing can engineer its vaunted soft landing as it transitions the economy to a more balanced growth model, but as usual, the extreme bears who have written it off already aren't terribly convincing, upon closer inspection.