Tourism, Stock Connections, and Renminbi Outflows in 2015.

The impressive appreciation in the renminbi since 2006, despite the rapid increase in the domestic money supply, was justified because of China’s rapidly increasing foreign exchange reserves. Since the renminbi was pegged to the dollar in 1994, the only time China’s foreign exchange reserves decreases over an extended period of time was during the Asian Financial Crisis to bail out the Hong Kong Monetary Authority. Beginning this year (2015), China’s foreign exchange reserves have began to consistently decline.

The South China Morning Post printed two articles discussing trends that will ensure this trend continues. A declining foreign exchange reserve will make it more difficult for the Chinese monetary authorities to maintain the current exchange rate against the dollar.

On August 7, 2015, the South China Morning Post reported:

“Outbound travel, which mainland airlines see as the fastest growth driver this year, is set to outnumber inbound visits to China for the first time in 2015.”

The good news for Chinese is that their increased wealth allows them to travel overseas for business and leisure. The bad news for the Chinese monetary authorities is that as more Chinese visit other countries, more renminbi will be exchanged for foreign currency to be consumed overseas. This will cause a decrease in the amount of physical foreign currency cash in China.

On August 8, 2015, the South China Morning Post reported:

“Average daily turnover of international investors trading Shanghai stocks via the stock connect scheme between Hong Kong and Shanghai has dropped to 8.92 billion yuan (HK$11.12 billion), down 21.47 per cent from the level in June. In July, daily sell orders averaged 113.9 billion against 82.4 billion of buy orders.”

The stock connect scheme currently only applies to Shanghai listed stocks, but will likely be extended to Shenzhen. There are three primary issues that make Hong Kong equities much more attractive than Mainland equities. First, the number of delisted stocks has significantly lowered the number ot tradable equities. According to the same article, after a peak of 900 delisted shares in July, there are still 311 delisted shares in Shenzhen, alone. Second, even after significant declines in price, many of the stocks listed in Shenzhen are still trading 100 times earnings per share. Third, even foreign companies have been impacted by the restrictions on normal market functions. Citadel Securities, a unit of a U.S. hedge fund, announced on Monday (August 3, 2015) that one of its China accounts had been barred from trading during the crackdown on “malicious short selling.” All of these issues will drive more foreign and Chinese capital out of the Chinese capital market and into foreign capital markets, which will facilitate more declines in the foreign exchange reserve.