China’s capital account is confounding. It’s constantly undergoing reform. At once it seems completely closed, the yuan utterly non-convertible. Yet at the same time the account appears strikingly open.
For example: Ukraine came this week looking for US$17 billion in loans. Argentina heard about that and showed up asking for the same amount to dam up its rivers. China even agreed to finance a high-speed rail network in the UK.
While these huge sums of money are being moved between countries, the lackadaisical hacks at CER can’t even exchange more than US$500 at a local bank.
Why’s that? Here’s our theory: If you’re dealing in the US$0.01-$500 range, the capital account is a welcoming door. But between US$500 and something like US$1 billion, all deals are off. Yet if you roll up to the bank with US$5 billion worth of renminbi in the back of a garbage truck, the teller will gladly accept the transaction. So that’s why, when Ukrainian President Viktor Yanukovich shows up on the doorstep of Zhongnanhai looking for a few billion, China’s top leaders (probably MOFCOM’s Lou Jiwei) have no problem wiring that money over.
If you’re Robin Li, Baidu’s founder and China’s new richest man worth US$12.23 billion, it should be just as easy to move those money bags around.
Things are changing quickly. The epicenter of capital account reform is in Shanghai’s free trade zone. It won’t be long before the yuan is completely convertible (within the zone), meaning that one entity can transfer a huge amount of money to another entity somewhere within the 29-square-kilometer zone (as long as it’s within the zone). That’s a big zone. No one wants to have to carry US$1 billion all the way to the other side. “Just wire it; it’s easy,” the regulators will say. “But just keep it inside the zone.”
As for transferring swimming-pool-sized wads of cash outside of the zone, that could be years off. But for now, money is going to be moving faster than China’s regulatory bodies can count it (all inside the zone of course).
Here’s some advice for handling all this capital account weirdness: China’s stock exchanges have been some of the world’s worst performing over the past few years. They even shut down IPOs, although that’s about to change. One of the biggest problems now is a lack of liquidity, and regulators seem perplexed by the issue. Why not just let some of us on the outside pile our money into Chinese stocks? CER would like to see what would happen if they lifted the flood gate on that. Maybe the regulators are protecting us from ourselves.
Here’s an inside tip: The yuan might first become fully convertible at a Chinese special economic zone on the moon.