China has a terrifying new problem.
Instead of the usual problem of too much money leaving the country, there is now too little money flowing in.
"Beijing is clamping down hard on outflows," said professor Christopher Balding, an economist at Peking University.
"The problem now is that inflows into China are collapsing. Probably down almost 40% this year. That is placing maybe even more pressure on the RMB [yuan] than the outflows. To run a fixed exchange rate you have to balance those things."
China devalued its currency in August. Shortly before the devaluation, Goldman Sachs noted that "capital outflows have become very sizable and now eclipse anything we've seen in the recent past."
Since the devaluation, money has left the country in fits and starts. In September and October it was pouring out, but then outflows moderated. As the yuan started falling against the dollar again at the beginning of this year, the deluge started again, then moderated again.
Because of this, the government has become extra disciplined about capital controls — as disciplined as a government can be when people who want to move money seem to have boundless creativity.
But without inflows, restricting outflows won't be enough.
"Money is still leaving significantly though definitely slowing in March and April and I suspect May will be more of the same," Balding said in an email to Business Insider.
Your run-of-the-mill bounceback
To be fair, investment in China has historically tended to lag during the first half of the year and ramp up in the second half. But there is reason to believe that this time will be different. China's stimulus measures are having less and less of a positive impact on the economy as debt mounts and credit needs to be productive, not just plentiful.
The government has said over and over that it won't engage in major stimulus, and analysts think this means that measures taken to stave off disaster at the beginning of this year will not continue.
"We still see support for growth from the improving housing market, the lagged effect of strong credit growth in Q1, and accommodative fiscal and monetary policies," Barclays analysts wrote in a note published Wednesday.
"For H2 16 and beyond, we maintain our view of a growth slowdown due to capacity reductions, unsustainably rapid credit expansion and high debt burdens, particularly in the corporate sector. That said, we maintain our monetary policy forecast for a total of 150bp RRR cuts during the rest of year and think the PBoC will cut benchmark interest rates twice (25bp each) in H2 16, with a risk of fewer cuts."
This is giving the people who usually call for a China rally in the second half of the year a little bit of pause. The government might really be ready to let the economy suffer a bit to wean it off its addiction to cheap debt. This is not making investors want to jump into China.
Either way, Balding said: "Unless [investors] flood back in H2, you will still end the year down significantly. I don't know anyone that is rushing to put money into China. Chinese and foreign investors are saying the same thing: don't buy China right now."
The decline of the yuan over the past few weeks isn't attractive to investors either, to say the least. With the economy slowing, though, it is what the market is dictating, and China has said over and over again that it will allow the yuan to move based on market demands.
"Beijing is going to go a long way to defend the RMB [yuan] so unless they just get overwhelmed — something I would call a low probability event in the next few months — expect them to step in to stabilize though do not be surprised by periods of real volatility," Balding said.
"Beijing is not the best speed boat driver."
