Chinese Exports are Falling and Foreign Investors are Taking their Money out of China

Posted by PITHOCRATES - January 8th, 2012

Week in Review

Exports tumble and foreign investors pull out their capital.  Could it be that the great Chinese economic juggernaut has run its course?  Perhaps (see China seen suspending open-market operation posted 1/4/2012 on MarketWatch).

China’s central bank suspended its regular open market operation Thursday, thereby injecting funds into the market in Beijing’s latest attempt to provide support to the country’s slowing economy, people familiar with the situation told Dow Jones Newswires.

The unexpected move boosted investors’ expectations that the People’s Bank of China might lower banks’ reserve requirement ratio later this month, after Premier Wen Jiabao warned Tuesday that the first quarter may be a difficult one for the country, as profits are being squeezed by slumping demand for China’s exports and Beijing is focused on fine-tuning both monetary and fiscal policies…

Moreover, recent capital outflows have made it less necessary for the central bank to drain excess liquidity from the banking system via its open market operations, said a Shanghai-based trader at a local bank.

China saw a net CNY24.89 billion of foreign exchange outflows in October, the first net monthly foreign exchange outflow since 2007, signaling that global investors are pulling money out amid fears of a global downturn and reduced expectations of future gains by the yuan.

The Eurozone debt crisis has hurt Chinese exports.  Foreign investors see that the good times may be over and they are pulling their money out of China.  This will drain excess liquidity and possibly raise borrowing costs.  Which is why some are hoping that they lower banking reserve requirements.  Which will inject more money into the economy.  To help them build more exports.  That are selling less and less.

Expanding capacity during times of shrinking demand may not be the best course of action.  What it can do, though, is build up an asset bubble.  That will pop.  Which will bring a round of deflation the likes of which they have never seen before.  Sort of like the decline of housing prices in the U.S.  Which hasn’t helped the U.S. economy.  As it won’t help the Chinese economy.

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