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Golfers prevented from making speculative profits on the RMB

March 27, 2008 in Hot money, Uncategorized by Michael Pettis | No comments

A while back on one of my earlier postings I wondered whether one of the first acts of Wang Qishan, the country\’92s new economic czar, might be the try to reduce capital inflows by more rigorously enforcing capital controls.\’a0 I really didn\’92t think this kind of administrative response to a monetary problem would be likely to work for more than a few weeks, but this kind of strategy does seem to mesh with the bureaucratic instincts typical of government officials.

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I have no idea if this is in fact part of his plan of attack, but clearly someone out there is worried about illegal capital inflows.\’a0 In the \’93Comments\’94 section of my last posting one of the readers, he uses a pseudonym but I suspect it is one of my former students now trading at one of the large banks, left me this message:

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I saw this sign while I was at a golf resort with a friend in Shenzhen last week: due to SAFE\’92s requirement, starting from April 1, all golf clubs in Shenzhen are not permitted to accept HKD.

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Ouch!\’a0 When the State Administration of Foreign Exchange starts interfering with the ability of China\’92s business elite to pay golf club dues with unwanted foreign currency, you know that things are getting just a little out of hand.\’a0 What next?\’a0 When they start telling me that I can\’92t use $100 bills to light my cigar but instead must use large-denomination RMB bills, I guess it\’92ll be time to panic.

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Meanwhile the fight against inflation continues.\’a0 According to today\’92s Bloomberg:

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The government this month ordered state-owned Sinopec Group and China National Petroleum Corp. to boost fuel supplies to end shortages. Demand has increased since factories reopened after the Lunar New Year holiday and because of reconstruction work prompted by the worst snowstorms in half a century.

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The article reports that in order to ease the fuel supply shortages that are spreading around China the country\’92s oil refiners have been told to reduce production of things like liquefied petroleum gas and propylene in favor of increasing the production of gasoline.\’a0 I am not an expert on the subject but I wonder if the switch (besides causing losses at the refiners, who have to switch out of the production of goods with no price controls and into the production of goods whose prices are set way below costs) will have any real impact on inflation.\’a0 It might simply cause the cost of those other goods to rise.\’a0 For an orthodox economist this may be a text-book illustration of the consequences of price controls: shortages plus price hikes in related products.

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China Daily is also listing anti-inflation measures.\’a0 In an article today they report that the government is taking steps to boost agricultural production as a way of cooling inflation:

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China promised on Wednesday to increase financial support for agricultural production as part of a larger effort to cool an inflation surge blamed on food shortages.\’a0 “Reinforcing agriculture has a pivotal role in maintaining sound and fast economic development, curbing inflation and safeguarding stability,” the State Council, or the Cabinet, said in a statement.

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The Cabinet agreed in an executive meeting chaired by Premier Wen Jiabao that China would \’93immediately\’94 increase the subsidies for farmers’ purchase of production materials and seeds, and raise the government’s purchasing prices of grain.

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I definitely think it is a good idea to provide farmer support if this helps the government\’92s income redistribution strategies, but I am not sure that it is likely to have much impact on food prices this year.\’a0 Of course I am not a farmer, but I would guess a food-production incentive \’96 even if it became effective immediately and resulted in cash outflows tomorrow \’96 would still take several months, and perhaps even a year, before it actually resulted in higher food production.

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None of these reports give me much comfort that inflation is going to come down.\’a0 One analyst who like me has been persistently bearish about inflation prospects is Dong Tao at Credit Suisse. In his report today he mentions the \’93surprising\’94 fact that reserves were up $119 in the first two months of 2008:

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China\’92s foreign exchange reserves had a surprisingly strong surge over the first two months of this year, according to China Business News. This Shanghai-based newspaper suggested that China\’92s FX reserves increased by US$61.6bn in January and $57.3bn in February, raising the total FX reserves to $1.65tn. If the numbers are confirmed, that would make them the highest and second highest monthly increases in FX reserves.\’a0 The increments were roughly about 26% of the total increase in 2007. China\’92s FX reserves accumulation was very rapid during 1H07, but had moderated in 2H. \’a0China Business News is known for leaking out unreleased data, that, in most cases, were proven correct later on. The People\’92s Bank of China and the State Administration of Foreign Exchange usually reveal quarterly FX data only, although from time to time government officials do cite monthly numbers.

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After trying to list the known components of the surge he then draws the same conclusion Logan Wright and I drew when we first saw these numbers six days ago (I guess we were a little quicker on the draw to get the information): \’93Still, the surge in reserves is too large for us to explain; if the data are proven to be true, there might have been acceleration in hot money inflows.\’94\’a0 He then concludes with something with which my readers knew I would concur:

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The latest FX reserves data would add more pressure on RMB appreciation, in our view.\’a0 While we do not see any imminent (i.e., in the next couple of weeks) one-off currency revaluation, that risk is on the rise in the medium term. With limited space for maneuver in interest rates amid a global easing cycle, as well as the rising inflation threat, it is our view that Beijing will lean more towards the exchange rate as a monetary policy tool.

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On a slightly different note, there was a time \’96 until last summer, basically \’96 when I spent a lot of time worrying on this blog about problem loans in the banking sector.\’a0 The acceleration of inflation and the upsurge in anxiety among the financial authorities has sort of pushed non-performing loan concerns into the back pocket, but of course that doesn\’92t mean that concerns about the health of the banking system are no longer relevant. \’a0

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They are, more than ever, I think.\’a0 One almost inevitable consequence of the wild and accelerating monetary expansion we have witnessed in the past few years is a tendency for bank loan portfolios to become increasingly risky, and I am more worried than ever that a sharp slowdown will cause a surge in non-performing loans.\’a0

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I was reminded about this by an interesting article by Jake van der Kamp in today\’92s South China Morning Post.\’a0 He mentions a report claiming that \’93the bad debt ratio of leading mainland banks could fall to 5 per cent this year from 6.2 per cent last year, China Banking Regulatory Commission chairman Liu Mingkang said in Hong Kong yesterday.\’94

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Van der Kamp comments\’94

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I can tell you that six years ago the central bank governor said that 25.37 per cent of the loans at the four biggest state-owned commercial banks were non-performing, which makes 6.2 per cent last year look very good. Things seem to have improved dramatically. \’a0But stop and think about this. \’a0Banks do not keep non-performing loans on their books forever. If borrowers still cannot make interest payments after a stipulated period, then lenders write these loans off or, as has too often happened on the mainland, saddle the central government with them.

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I do not know what the average period on the mainland is between first classifying a loan as non-performing and finally writing it off, but it is definitely a good deal shorter than six years. \’a0The 6.2 per cent non-performing ratio last year must therefore represent relatively fresh lending that has gone sour rather than the rump of old loans that are still not being serviced. \’a0

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And this I certainly find difficult to understand. How can the financial system of an economy that has registered double-digit annual growth rates for the past six years have any non-performing loans? \’a0You may say that there are always a few borrowers in any system who cannot repay their borrowings but they must be precious few in an economy that has expanded by 80 per cent in real terms in just six years. If not, their bankers must be spectacularly incompetent.

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\’85You just have to ask the question. If this is what it was during the best possible times for financiers, what might it be during bad times?

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Good question, and one that many of us have asked. \’a0There is an old banker\’92s saying that I have repeated here often enough: \’a0Bad loans are made during good times.\’a0 I doubt that this time will be much different.

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What is the PBoC doing to repo rates?

September 20, 2007 in Uncategorized by Michael Pettis | No comments

Dan Rosen was the first to alert me to the fact that short-term rates in China have soared in recent days.\’a0 The benchmark rate is the 7-day repo rate, which hit a pre-September high of 4.77% in April.\’a0 Today, however, it went to 6.69%.\’a0 The one-year repo rate, which had peaked at 4.45% in April was even more volatile, reaching 7.21% today.

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My first thought was that this was a reaction to some recent large IPOs, notably the China Construction Band deal which priced on Monday with $300 billion of demand.\’a0 Combine this with a 50 basis point increase in the bank reserve ratio last week, and the recent and planned sales of long-term MoF bonds to finance the sovereign wealth fund, and it seemed like the run-up in rates was caused by a normal excess demand for funds in the repo market. \’a0This is how it was described last Thursday (September 17) in the South China Morning Post:

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Traders dumped mainland bills and bonds on Thursday as a money market squeeze triggered by tighter policy and China Construction Bank\’92s huge Shanghai initial public offering worsened. \’93There\’92s panic selling – people are scrambling to raise funds,\’94 said a trader at a Chinese bank in Nanjing. \’93Liquidity is much tighter today than yesterday.\’94

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The money market has suffered half a dozen other squeezes this year during big initial public offers of equity, and each time short-term interest rates have quickly pulled back near their previous levels after the IPO has passed. But the current panic appears to be more serious because it is occurring at a time of unprecedented monetary tightening, and after Tuesday\’92s announcement that last month\’92s inflation jumped to a 10-year high of 6.5 per cent, several traders said.

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Over the past week authorities have announced a reserve ratio increase, a 151 billion yuan issue of special bills and a plan to sell 200 billion yuan of special bonds to the market, while an interest rate rise is expected as soon as this week. That has left the market unsure about how much liquidity the central bank intends to leave in the market after the IPO is completed, and how far short-term rates will eventually come back down. \’93There are too many uncertainties about policy now. The special bond issue really scared the market,\’94 said a trader at a leading domestic bank in Shanghai.

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Trading volume has shrunk dramatically because of the squeeze but some individual bonds were quoted early on Thursday at yields at least several basis points higher than Wednesday\’92s levels, traders said. \’93Nobody is buying bills or bonds,\’94 said the trader in Nanjing. The weighted average seven-day repo rate, the key measure of short-term liquidity, jumped to a fresh two-month high of 4.0173 per cent from Wednesday\’92s close of 3.8437 per cent. Traders think it could hit a multi-year high of 5 per cent in the next couple of days as subscriptions are taken on Friday and Monday for CCB\’92s IPO, which is expected to attract a record total of more than 2 trillion yuan in subscriptions.

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The central bank appeared to be trying to ease the squeeze last Thursday by canceling its regular weekly issue of three-year bills. That means it injected RMB 140 billion\’a0into the market, against a net drain of RMB 145 billion last week.\’a0 But that wasn\’92t the end of the story.\’a0 Today, as Dan pointed out, the deals have been put the bed and the unsuccessful bids returned, but instead of coming down, rates have actually increased.

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So what is going on?\’a0 Quite a lot, it seems. \’a0Market rumors are that this is all part of a short squeeze engineered by the PBoC because of their worries about inflation and rising stock prices, which may be linked in their minds.\’a0 Instead of acting to balance short-term changes in the supply of and demand for funds, as they normally do, they are simply walking away from the short-term markets and allowing rates to rise sharply.\’a0 By causing such volatility in market and letting short term rates rise so sharply, albeit temporarily (money is expected to seep back into the market over the next few weeks), they are hoping to undermine speculative fervor and, by slowing down the stock market, even take wealth-effect pressure from consumption (and thus reduce inflationary pressures).

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This squeeze might have a dampening impact on the stock market, but since margin buying is illegal, I am not sure how the transmission will work. \’a0At any rate the market has been slow but not panicky in the last three days, and in fact was up 1.40% today.\’a0 I suspect\’a0high repo rates\’a0may dampen demand for new issues more than\’a0they affect secondary trading levels.\’a0\’a0

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There may also be a very negative and unintended consequence. \’a0With the Fed having lowered rates by 50 basis points, this may not be the best time to raise short term RMB rates if the PBoC wants to discourage speculative inflows.\’a0 After all, if you can get 7% in RMB, plus 5% or more in expected RMB appreciation against the dollar, the resulting 12% return in dollars is high enough to make all but the wildest hedge funds pretty happy.\’a0 Of course anything that encourages more hot money into the country will simply exacerbate the very process that is at the root of the imbalances the PBoC is so desperate to end.

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Will any of my former students or other readers of this blog who are active in the local money markets weigh in? \’a0What exactly is going on?

China and the savings glut

September 15, 2007 in Savings glut, Uncategorized by Michael Pettis

On September 11\’a0Ben Bernanke, Chairman of the Federal\’a0Reserve, gave a very useful presentation at the Bundesbank Lecture in Berlin.\’a0 It can be read at ,\’a0and I strongly recommend that my Peking University students all read it.

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Bernanke argues, as he has many time before, that the world is experiencing a savings glut.\’a0 According to him a number of developing countries, especially\’a0China and the OPEC countries, along with Japan, are saving far more than they are investing.\’a0 That means inevitably that they must export capital and run trade surpluses.\’a0 As the US is usually considered the safest and deepest financial market in\’a0the world, the US is the recipient of the world’s global excess savings.\’a0 The inevitable result is that the US must run substantial trade deficits as the counterpart to its capital surplus.

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I have been a believer of this thesis for several years.\’a0 Unfortunately Bernanke\’92s position has become much politicized and there are arguments back and forth about whether his hypothesis is merely\’a0an attempt to “blame” the US trade deficit on excess savings by foreigners rather than excess consumption by Americans.\’a0 These sorts of arguments are idiotic.\’a0 The fact is that any deficit country must by definition have \’93excess\’94 consumption over savings, and any surplus country must have \’94excess\’94 savings over consumption, and it is not at all obvious which way the causality runs.\’a0 At any rate in my opinion this global \’93imbalance\’94 is probably a good thing in the long term because running trade surpluses against the US is the only way Europe, Japan, China and Russia will be able to pay for the very brutal demographic adjustments they must make over the next two to three decades \’96 and make no mistake, these adjustments will be brutal.

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But leaving aside the silly argument as to whose fault it is, does Bernanke’s argument do a good job of explaining the current US-China balance of payments?\’a0 I think the answer is yes \’96 in fact it seems to me that China is a particularly good example of Bernanke\’92s thesis.\’a0 China does save too much \’96 even the Chinese authorities acknowledge this, and they have made repeated and unsuccessful attempts to boost consumption.\’a0 The resulting trade surplus with the US is the inevitable consequence of this excess savings.

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There has been a series of decisions made at both the macro level and at individual levels that explain the high savings rate in China, and these decision lead inexorably to the accumulation of US assets (through central bank purchases). Of course if China is running a large capital account surplus with the rest of the world, it must run an equally large trade surplus, and as the only country capable of absorbing such large flows, it falls to the US, with its very open financial markets, to absorb China\’92s trade surplus (excuse me for fudging the distinction between a trade surplus and a current account surplus, but in this case the distinction is unnecessary).

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Of the three most obvious reasons leading to this decision towards excess savings, in my opinion, the first and most obvious arose as a consequence of the Asian Crisis in 1997. China\’92s policy-makers, like those of many other countries, were horrified by the impact of the crisis on the affected countries.\’a0 Unfortunately; also like many other policy-makers, they may have drawn the wrong conclusion about the cause of the crisis.

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The Asian Crisis, like all financial crises, was caused because of serious mismatches in the national balance sheets that left the afflicted countries vulnerable to shocks that could quickly cause their balance sheets to unravel.\’a0 These mismatches create what looks like a virtuous circle when conditions are good, but they quickly become vicious circles when conditions change.\’a0 In the case of Korea, Thailand, Indonesia and Malaysia in 1997, this mismatch occurred in the form of having used highly liquid external capital for many years to fund less liquid domestic assets.\’a0 As long as capital poured into these countries, as they did until 1997, the result was a boom in which both sides of the balance sheet improved simultaneously \’96 domestic asset values rose while real appreciation in the value of local currencies eroded the cost of external debt.\’a0 The process led to imbalances in asset values, however, which ultimately would cause capital to flow out \’96 to devastating effect on the national balance sheets.

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The incorrect lesson learned was that it was too much external debt and the lack of foreign currency reserves which left a country vulnerable to crisis (this lesson, of course, merely seemed to reinforce the lessons of earlier crises in Mexico, Brazil and elsewhere). The policy conclusion was that countries should limit highly liquid forms of capital inflow and systematically run trade surpluses to build the necessary reserves to protect them from the risks of future outflows.\’a0 Unfortunately in their haste to implement policies that encouraged trade surpluses, financial authorities in China and elsewhere may have put into place the policies that led to equally severe, but largely domestic, balance sheet mismatches.\’a0 (I strongly believe that next big round of global financial crises will be domestic banking crises.)

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The second obvious cause of Chinese macro policies to boost savings was its very Asian reliance on export growth, and import constraint, to achieve sustainable growth in employment.\’a0 Since exports are the excess of production over consumption, in a growing economy boosting net exports is the flip side of raising the total amount of savings.\’a0 I think Joan Robinson\’92s investment multiplier explains how this happens. \’a0As Chinese authorities channeled investment into infrastructure and production facilities aimed at developing the export sector, the resulting increase in national income was separated into high savings and low consumption, and the growing difference between production and consumption was exported.

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This decision to boost exports had particularly Chinese reasons.\’a0 While most state-owned enterprises, which had dominated the economy until very recently, were inefficient and had too many useless workers, the export sector could take advantage of China\’92s natural advantages \’96 cheap but dependable labor, a relatively strong infrastructure, and highly concentrated economic policy decision-making \’96 to fuel an export boom that would absorb workers.\’a0

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Among the policies put into place to support export growth was an undervalued currency within a rigid currency regime \’96 it had to be rigid to reduce uncertainty among exporters.\’a0 This export-orientation was exacerbated by the decision to join the WTO which, in my opinion was not about the benefits of free trade (the Chinese government has no natural predisposition to free trade) but rather about the need to use external constraints to open up the domestic markets, which were subject to a host of impenetrable trade barriers among provinces.\’a0 In that sense I liken joining WTO to Argentina\’92s use of a currency board (an external constraint) to force discipline on the spending habits of provincial governors.

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The third obvious source of excess savings was the transformation taking place in China that significantly increased uncertainty as it reduced the social safety net.\’a0 As the cost and need for education rose, as medical services collapsed except for those with money, and as it became clear that there would be no protection for those that retired or were put out of work, worried Chinese families put an increasing portion of their rapidly rising income into savings, in an attempt, not yet wholly successful given the pace of the safety net collapse, to protect themselves from uncertainty.

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The “nuclear threat” of Chinese reserves

August 8, 2007 in Uncategorized by Michael Pettis | No comments

A friend sent a story from which the following is excerpted.\’a0 Unfortunately he did not send me the source, but it has been widely written up and discussed:

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China should use its massive holdings of foreign exchange reserves as a bargaining chip in its discussions with foreign governments, a senior advisor to Beijing said at a conference here at the weekend.\’a0\’a0\’a0\’a0\’a0\’a0\’a0\’a0\’a0

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Xia Bin, an economist with the Development Research Center, a think tank under the State Council, noted foreign press coverage calling China’s $1.33 trln in foreign exchange holdings the “nuclear threat” and said that the government should realize its potential.

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“Of course, China doesn’t want any undesirable phenomenon in the global financial order but I personally believe we have so many foreign exchange reserves that we should be smarter in setting the issues. It should at least be a bargaining chip in talks,” he said.

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Not surprisingly, this talk of a nuclear threat (see entry below) has caused a lot of concern.\’a0 How credible is it?\’a0 Not at all, in my opinion.\’a0 In fact the whole thing is a little silly, for at least thee reasons, and I don’t think any of the financial authorities\’a0in China believe otherwise (although if it helps to frighten US congressmen from behaving too irrationally on the trade front it is probably a good thing).\’a0

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1.\’a0 It overestimates the importance of PBoC reserves relative to the overall market.\’a0 $1.4 trillion are a lot of reserves for any central bank, but the total amount of liquid securities in the US\’a0is many times that number and even weekly turnover dwarfs that number.\’a0 Every year the US trade deficit, which is roughly half that number, gets financed with absolutely no difficulty.

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If there were a sudden major sale. what would it look like?\’a0 The last time there was a massive fire sale of US assets was probably during the start of WWI when, in order to finance the war effort, European belligerents dumped\’a0an amount of US securities equal to a\’a0greater share of total US securities than the amount China currently holds — and this in a much less mature financial system.

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The impacts on the US markets were not nearly as dramatic as one might have at first expected.\’a0 There was a brief panic and the NYSE was closed for a short time, but my understanding is that this had more to do with US\’a0Treasury fears of a short-term gold outflow than with the ability of the market to absorb the sales.

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At any rate the net impact turned out to be a major transfer of wealth from Europe to the US as American investors snapped up years of carefully invested European savings at bargain prices.\’a0 A fire sale of PBoC assets would almost certainly result in a similar transfer of hard-earned Chinese savings to US and\’a0non-US bargain hunters.

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2.\’a0 It ignores the likelihood that a massive sale of US assets by the PBoC would immediately trigger large offsetting purchases.\’a0 Remember that any decision by the PBoC to sell dollar assets is also automatically a decision to buy other non-Chinese assets.\’a0 What could they buy?\’a0 Almost certainly only euros, yen, sterling, and a few other currencies (even purchasing commodities would simply imply a recycling of PBoC dollars into dollars, euros, yen, etc. by the commodity sellers).

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Any attempt to do so, of course, would cause these currencies to shoot up against the dollar.\’a0 It is hard to imagine that other central banks would stand idly by and watch this happen (with the attendant trade implications) without themselves intervening to support the dollar.\’a0 Throw in the foreign bargain hunters looking to buy up cheap US companies and US institutions who hold vast amounts of money offshore, who would be more than happy to bring it back home to buy cheap US assets, and there is plenty of\’a0buying power to set off against PBoC sales.\’a0

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This is not to say that the market would immediately stabilize, nor that we wouldn’t have some very scary moments, but rather that the disruption would be of relatively short duration, and would probably have a limited impact on the country’s underlying economic health.\’a0

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3.\’a0 Finally, let’s assume a worst case scenario:\’a0the dumping of US dollars by the PBoC causes a sharp and damaging rise in\’a0US interest rates\’a0and a significant slowing down in the US economy.\’a0 For the reasons described above it would also cause a similar impact on most other major economies.\’a0

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How would China benefit?\’a0 There would be a nearly immediate collapse in world trade as the US deficit shrunk to zero (remember, if no one finances it, it must be zero).\’a0 The economic impact on each country would depend largely on how flexible its financial system was in absorbing shocks and where global savings would flow.\’a0 In both cases it seems pretty safe to bet that the US would suffer least of any major country.\’a0 It has an astonishingly flexible financial system that has allowed it to withstand a whole series of financial shocks over the past several decades with almost no spillover into the real economy, and in times of trouble there is plenty of evidence to suggest that money will fly to the US as a safe haven.\’a0

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China, on the other hand, would find it extremely hard to escape the consequences.\’a0 Not only is its financial system rigid and poor at processing information and capital, but its economy is highly dependent on the export sector.\’a0

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Cleaning up ABC

August 7, 2007 in Uncategorized by Michael Pettis | No comments

One of my former students who now trades local interest rates talked to me over the past few days about mysterious activity by the PBoC involving their buying large amounts of dollars forward from three of the Big 4 local banks and so forcing them to cover in the spot market.\’a0 The result had been to dry up onshore dollar liquidity.\’a0 It wasn’t clear why they were doing this but there were rumors about a big cash transfer to ABC, and that somehow this was tied together.\’a0

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We wondered if this didn’t have something to do with the planned transfer of $200 billion from the PBoC to the new CIC.\’a0 How would it work?\’a0 There\’a0have been\’a0rumors that the CIC would sell the first tranche of bonds to ABC which, after a reasonable lag (supposedly to mantain the “independence” of the PBoC) would then\’a0sell them on to the PBoC.\’a0\’a0 If that were actually what happened, the net result would simply be a swap of long-term CIC bonds (denominated in yuan) for US dollars.\’a0 The monetary impact would be zero, unless the PBoC started selling these bonds in its open market operations (instead of central bank bills, which are a near-substitute for money) aimed at sterilizing the domestic money supply.\’a0

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Yesterday there were reports that the CIC is buying Central Huijin from the PBoC and paying $65 billion for it.\’a0 Central Hujin in turn will use $40 billion to recapitalize ABC.\’a0 It will\’a0transfer a further $20 billion to China Development Bank supposedly as part of its transformation from a policy-lending bank to a commercial bank.\’a0

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My student did suggest,a few days later, that the PBoC\’a0might have been\’a0trying to dry up onshore dollars because corporations were using onshore dollars to speculate on yuan appreciation.\’a0 There are at least two ways he suggested they are doing so.\’a0 One way involves borrowing dollars onshore from the big Chinese banks, who either have dollars offshore (think IPOs or the bank recapitalizations) or can acess them by borrowing.\’a0 These corporations borrow today to pay for deliveries of commodities or other imports, which they sell for local currency and so earn the “arbitrage” (i.e. the cost of borrowing dollars is negative in yuan terms after you take into account yuan appreciation, whereas the return on yuan deposits is low but positive).\’a0

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Alternatively, corporations are doing something that the banks aren’t allowed to do.\’a0 They are selling dollars foward on the onshore market (they are not regulated the same way banks are, or it is easier for them to fake it, so they can\’a0sell dollars forward\’a0even if there is no legitimate offsetting transaction), and then buying dollars forward on the NDF offshore market.\’a0 Since implied dollar appreciation on the offshore market is a couple of percentage points higher than on the onshore market, the corporations keep the spread.\’a0\’a0\’a0

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All this adds to the speculative inflow that is driving the PBoC crazy.\’a0 As usual, hot money is not just (or even mainly) foreign money but rather smart domestic money, and as usual one problem with capital controls is that an awful lot of brain power is used up figuring out how to profit from exploiting the rules rather than creating economic value.\’a0