1 Trillion Yuan Underground Banking Busted

According to official figures China is making the turn into a consumer driven economy and slowing the decline of its economy. On the other hand Chinese debt is reaching astronomical levels. Perhaps the most accurate indicator of how well or poorly things are going is China is the increased level of capital outflow. The government has taken steps to make it harder to move money out of China so some wealthy Chinese have gone underground. Bloomberg reports on the crackdown on illegal capital outflows in China and a $148 billion bust of underground banking.

China’s campaign to crack down on illegal capital outflows saw its currency regulator bust underground banking operations that involved more than 1 trillion yuan ($148 billion).

The news underscores both the desire of Chinese to diversify money out of their country, and the determination of authorities to restrict outflows that put pressure on the nation’s currency and trigger even greater capital flight. The yuan has depreciated 7.8 percent against the U.S. dollar since the People’s Bank of China’s mini-devaluation in August last year. It has fallen 1 percent this month alone.

It appears that folks in China who made huge amounts of money in the rapid expansion of their economy are not confident in the next phase and want to at least hedge their bets by moving money offshore, by illegal means if legal avenues are closed. This news help confirm the opinion that there is more money leaking out of China that official figures indicate.

Chinese Economy

The depreciation of the Yuan and associated capital outflow is based on the slowing performance of the Chinese economy. The New York Times looks at what could happen as China’s economy slows.

China reported on Wednesday that its economy grew 6.7 percent in the third quarter compared with a year ago. That matched economists’ expectations exactly, and was identical to the pace China set in the first and second quarters of this year. In economics, stability like that is remarkable – and usually not to be believed.

Economists often look beyond the official numbers to find alternative ways to gauge the Chinese economy. Other figures and facts on the ground suggest that a lending binge that China has unleashed in recent months is helping to sustain growth.

The fact is that China’s central planning model of Capitalism with its borrow, invest and export focus is coming to an end. Here are three possible scenarios.

Financial Meltdown

China is still borrowing at historic levels and experts are starting to express their concern. China is at risk for its own version of the 2008 crisis that threw the United States into recession the current slow growth economy. This time around with China it could involve the whole world.

Complete and Total Recovery

China pulled its economy out of its slump in 2008 with massive lending. That is in fact what they are trying today. If debt issues and capital flight issues do not overwhelm the Chinese economy they could still succeed. Experts, however, say that the current measures are yuan for yuan less effective than last time. Part of this may be that people who previously would have borrowed to expand their businesses are setting up shop in the West or at least in Hong Kong.

Following Japan into a Lost Decade or Two or Three

Economists point to the Japanese experience and expect to see the same with China, too much debt, too little consumer spending and a stagnating economy for decades.

Only the possible middle path will be good for the Yuan.