Chinese Foreign Exchange Transaction Deficit

Last month China posted its first monthly Forex transaction deficit in more than a year. According to the English version of the online People’s Daily,

Chinese bought more foreign currency than they sold in August, resulting in the first monthly deficit in foreign exchange transactions in 13 months, China’s foreign exchange regulator said on Tuesday.

Chinese institutions and individuals bought 147.4 billion U.S. dollars in foreign currency and sold 146.6 billion U.S. dollars in exchange for 903.3 billion yuan last month, according to data from the State Administration of Foreign Exchange (SAFE), China’s forex regulator.

This is a measure of short term capital outflow from the Renminbi to the US dollar. But, what does a Chinese foreign exchange transaction deficit mean for Forex markets and Forex traders?

Why Is There a Chinese Foreign Exchange Transaction Deficit?

To a degree the Chinese foreign exchange transaction deficit may be simply a monthly fluctuation. But it also could be a harbinger of less money flowing into China from foreign investors and more capital being moved overseas by anxious Chinese investors. After all, the Chinese real estate bubble still exists. Chinese manufacturing growth is tapering off. And, overall Chinese economic growth is down below the government-approved rate of 7.5% per year and perhaps falling. There a very wealthy people in China who may well be moving assets out of Renminbi and into safe haven foreign currencies such as the USD. It also appears that Chinese currency traders have come to the opinion that foreign currencies might rise in relation to the Renminbi and are hedging their bets.

Renminbi or Yuan: Which Is Correct?

Renminbi is the correct name for Chinese currency. It means the people’s currency. However, when one tells you how much to pay for a new car they use Yuan, Chinese word for dollar or silver coin. For example a US dollar is referred to as a mei yuan and a Japanese Yen is referred to as ri yuan, American yuan and Japanese yuan respectively according to an article on bbc.com, Why China’s Currency Has Two Names.

Both names are perfectly good, but in slightly different ways.

“Renminbi” is the official name of the currency introduced by the Communist People’s Republic of China at the time of its foundation in 1949. It means “the people’s currency”.

“Yuan” is the name of a unit of the renminbi currency. Something may cost one yuan or 10 yuan. It would not be correct to say that it cost 10 renminbi.

Make Money with the Chinese Foreign Exchange Deficit

No matter which name you use to refer to the Chinese currency, you can make money trading the Chinese foreign exchange transaction deficit. There are always underlying reasons for why currency flows in and out of nations. The Chinese economy has been cooling off after a historic rise. There are several core issues that threaten the economic, social and political stability of Mainland China. The sum total of conflict with neighboring nations over resources, unhappiness with Communist leadership at home and the bursting of an expanding real estate bubble could drive lots of capital away from China and drive down the value of the Chinese currency. A recent article in the International Business Times talks about unexpected consequences of a Chinese real estate price drop.

China’s real estate sector, despite recent government attempts to spur it, continues to struggle: Two private surveys revealed that housing prices across the country fell 0.3 percent in August, and while nationwide housing prices remain up 4 percent year-on-year, it was the fifth consecutive month that prices have dropped.

In recent years, economists have worried that a sustained fall in China’s housing market would pose a grave threat to the Chinese economy as a whole. But an additional concern is that, in a world where an increasing number of Chinese citizens purchase property in foreign markets, a collapse in the real estate sector in their country may result in a flood of money leaving China and making housing even more expensive in markets as far-flung as Vancouver, New York and Sydney.

Traders who successfully anticipate such currency movements will be amply rewarded in their trades.