2014.02.28 By James Kynge
In guiding the renminbi into its steepest
dive since 2005 this week, Beijing was employing a strategy of “one arrow, two
vultures”, as the saying goes.
The first vulture denotes the international
speculators who have – in spite of warnings by Chinese officials – regarded
renminbi appreciation against the US dollar as a one-way bet. The second
vulture signifies the domestic shadow financiers who refuse to be brought down
to earth.
……
A shadow banker in Ningbo, eastern China,
recently described the attractions of such a trade. “It is easy to borrow
abroad at around 1 per cent annual interest. Then change that money into
renminbi and bring it into the mainland,” said the banker, who declined to be
identified because of the illegal nature of his business.
“You can get around 10 to 12 per cent by
lending it to a trust or around 20 per cent by putting it with an underground
bank. On top of that you get whatever the renminbi has appreciated by the time
you need to repay the foreign loan.”
One sign that this cross-border carry trade
has been robust of late is evidence of an increase in the over-invoicing of
exports, a common ruse used to spirit funds into the mainland. A China
Confidential survey of exporters in January found that 44 per cent of
respondents thought that such fake invoicing was on the increase.
Besieged by these pressures, it is hardly
surprising that the PBoC was keen to shoot an arrow. Its hope is that by
instilling in speculators’ consciousness a sense that the renminbi can fall as
well as rise, it will staunch the inrush of speculative capital lured by the
outsized returns available in the mainland’s shadow finance markets.
In this, as ever, Beijing is looking for
incremental shifts, such as the 1.2 per cent that the renminbi has depreciated
by so far this year. It knows that if it were to try to stop the inflow of
illegal capital entirely, it may trigger the very wave of financial defaults it
is hoping to avoid. Thus a gradual approach using exchange rate flexibility to
generate a market response seems to suit the PBoC’s objectives for now.
