On Sunday January 1 2017, a ‘new round’ of $50,000 per capita permissions to convert yuan into foreign currencies came into effect. A lot of Chinese people took advantage of that -- fast.

Because there is a lot of talk and a lot of rumors about an impending devaluation. That’s not so strange given the continuing news about increasing outflows and shrinking foreign reserves. And those $50,000 is just the permitted amount. Beyond that, things like real estate purchases abroad, and ‘insurance policies’ bought in Hong Kong, add a lot to the total.

What makes this interesting is that if only 1% of the Chinese population -close to 1.4 billion people- would want to make use of these conversion quota, and most of them would clamor for US dollars, certainly since its post-election rise, if just 1% did that, 14 million times $50,000, or $700 billion, would potentially be converted from yuan to USD. That’s almost 20% of the foreign reserves China has left ($3.12 trillion in October, from $4 trillion in June 2014).

In other words, a blood letting.

And of course this is painting with a broad stroke, and it’s hypothetical, but it’s not completely nuts either: it’s just 1% of the people. Make it 2%, and why not, and you’re talking close to 40% of foreign reserves. This means that the devaluation rumors should not be taken too lightly. If things go only a little against Beijing, devaluation may become inevitable soon.

In that regard, a remarkable change seems to be that

  • While China’s always been intent on keeping foreign investment out, now all of a sudden they announce they’re going to sharply reduce restrictions on foreign investment access in 2017.
  • While at the same time restricting mergers and acquisitions by Chinese corporations abroad, in an attempt to keep -more- money from flowing out.

Something that has been as unsuccessful as so many other pledges.

The yuan has declined 6.6% in value in 2016 (and 15% since mid-2014), and that’s probably as bad as it gets before some people start calling it an outright devaluation.



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