A roach motel is a pest control device sold in the US designed to lure cockroaches into a box containing bait. Unfortunately for the critters, they become trapped by sticky bits of glue inside the box. Hence the roach motel maker Black Flag's advertising pitch, "They check in, but they don't check out." In a similar way, China seems to be a capture device for foreign exchange. FX funds come in, but they don't go out. While just about any other developing nation would love to have China's problem of having too much foreign exchange coming in, it is a problem for China. These humongous surpluses only serve to embolden folks who cite them as evidence of China's "unfair" trade practices. Also, managing this FX pile has become difficult for China as it tries to diversify from holding too many US Treasuries.Two bits of news prompted me to write this post. First, SAFE has been given the unenviable task of tracking down FX inflows into China's fragmented financial system. As, er, Stephen Roach notes, "Beijing has talked tough on the monetary control front, but this talk has not achieved satisfactory results. Persistent excess liquidity, in conjunction with a still highly fragmented banking system and an investment decision-making process that is driven mainly by provincial and local considerations, have undermined policy traction." In addition to telling banks in big cities to watch their FX transactions, SAFE is hunting down unauthorized banks, foreign exchange dealers, and remittance operations. There is little doubt that large FX inflows are coming into China, both through authorized and unauthorized channels.
Second, China has been trying to encourage more FX outflows through placements abroad by citizens in its "qualified domestic institutional investor" (QDII) scheme. However, it has had few takers since only "fixed-return" (read: money-market) products are offered. Chinese investors also understand that it is only their government that is propping up the dollar's value; hence, it is probably wiser to keep monies in RMB as the dollar depreciates. Even SAFE Vice-director Li Dongrong vouches for this case by saying "China's QDII program is still in its infancy and the products are not selling well because of the narrow investment scope, high risks, low profits and poor accessibility." Investor interest has been lacking; however, SAFE is working on this case by perhaps offering investors opportunities for equity investments abroad. Given how Chinese stock mania continues unabated, local appetite for foreign equities might just be the ticket in promoting some foreign exchange to head out of the country.
