KKR's Take (= View) on China's Money Outflow

choi

(1) Ye Xie, China May Face Japan-Like Slump Unless Yuan Weakens, KKR Says. Bloomberg BusinessWeek, Mar 8, 2015 (blog).
www.bloomberg.com/news/articles/ ... an-weakens-kkr-says
(summary: "KR sees currency's `fair value' at about 7 [yuan] per US dollar")

My comment: The report is poorly written, and hard to comprehend. I recommend you read the original report. See next.

(2) Henry H McVey, Spotlighting 2016's Great Debates. KKR, Mar 8, 2016.
www.kkr.com/global-perspectives/publications/spotlighting-2016’s-great-debates

Quote:

(i) summary of some points: "Just consider that in the last ten weeks * * * China will have bled out $128 billion in reserves defending its currency. * * * In China, for example, nominal GDP growth has declined by 70% since 2011, compared to 'just' a 31% decline in real GDP growth during the same period. * * * China’s currency dilemma is primarily linked to its capital account, not its current account, we believe. Contrary to popular opinion, China is actually not losing market share in exports. In fact, compliments of a successful high-end export strategy, China’s overall market share of total global exports has increased to 13.7% in 2015 from 10.7% in 2011."

(ii) "we see China’s slowdown in growth as structural – not cyclical.

(iii) "In the past few weeks we have met with a slew of leading economists from Asia, Europe, and the US to review what their crystal balls are showing about economic growth for 2016. While I am not a trained economist, I came away convinced that folks are still too optimistic on growth. * * * we think that the consensus [ie, people other than KKR] has placed too much emphasis on real GDP [definition: nominal GDP minus inflation] – and too little on nominal GDP, which is not adjusted for inflation. A simple example, we believe, will help to illustrate our point. In China, nominal GDP growth is down 70% since 2011 to 6.0% from 19.6%, which is a big deal for a country that drives more than one third of global growth in some years. On a real basis, however, GDP growth in China has fallen 'just' 31% over the same period to 6.8% [6.0% plus deflation; see Exhibit 23 for the purple line] from 9.9% [19.6% minus inflation].  Importantly, as Exhibit 6 shows, China is not alone. Nominal GDP growth has turned down meaningfully across many economies [US nominal GDP growth -20% in the same period].

(iv) "China’s Currency Weakness Is Linked to Its Capital Account, Not Its Current Account * * * we thought it might make sense to offer some color on what we think China is trying to accomplish with its recent currency initiatives. Our bottom line: Contrary to popular opinion, we do not think China is necessarily trying to devalue its currency just to make itself more competitive on the export front. Rather, we think that China is feeling pressure to ease monetary policy and let its currency depreciate because it needs lower rates and a weaker currency to deal with deflation headwinds from too much debt and to re-liquefy an economy under pressure from significant capital outflows. Consistent with this viewpoint, China now faces the dilemma that its current account surplus is not large enough to offset the growing deficit from its capital account without taking a major step backwards in its liberalization campaign. * * * Second (and probably more important in our view), China has been actually gaining share in global exports in recent years (Exhibit 15), even though it has ceded the low end of the market to players like Vietnam, Africa, and Mexico (Exhibit 14). Put another way, China has moved swiftly up the value chain in key high growth markets such as high speed rail, nuclear reactors, new energy vehicles, and e-commerce. Meanwhile, on the low end, it has thoughtfully and willingly ceded share in areas where either Chinese wages are no longer competitive, the environmental impacts are concerning, and/or there is excess capacity.

My comment:
(a) capital account
https://en.wikipedia.org/wiki/Capital_account
(b) I agree with the italics in quotation 4. Still, I think it is ridiculous to say that China wants yuan devaluation to "deal with deflation" rather than declining exports. First of all, there are more suitable tools to slay deflation (than yuan devaluation). Secondly, can’t KKR see dwindling monthly exports in China and Taiwan?  In the so-called high-end, high-tech products of Taiwan, for example.
(c) There is no need to read the second half of the KKR report.