Dryfly is a regular commentator on calculated risk and one of the better (best?) ones. He really should start his own blog. Here is what he had to to say about high levels of investment in China…..
I work for companies who have put plants in China – they have been racing to get the plants in & operational & then transfer over & convert money about as fast as they can. As much as the Chinese will allow. They did it to get in under the revaluation should it happen. Lotsa companies are doing that.
Currency controls in PRC make it difficult to move big sums fast so the way to get around it is buy or build a plant IN China. Then liquidate it when the revaluation occurs – you should come away with more dollars for doing little or nothing IF all goes as planned…
In response to further questions he elaborated a bit more by saying…..
He doesn’t know where the ‘hot money’ is – no one does or isn’t saying – my guess is companies like the one’s I sell for are moving way more in than they need to operate. WAY MORE. They want it in RMB IN CHINA BANKS before the revaluation. So some of this transfer is in bricks & mortar and illiquid and some is liquid ‘operating capital’.
To them it seems like a win-win… if RMB stays weak they export to the US at a profit… if RMB appreciates they sell appreciated assets & reconvert operating capital back to USD. Seems brilliant until you learn the other part of the story – they are owned by a heavily leveraged PE firm (mid-level not B or K). They might be able to wait until the RMB revalues or maybe not. They might get their own ‘margin call’ soon. Maybe tomorrow.
A lot of smart folks are going to end up too smart by half before this is all over.
The “he” in the above comment is talking about Brad Setser who has been wondering about China’s accounts lately.
Dryfly mostly worries about these “smart” people getting margin calls. But I wonder if anyone will want to buy the factories from them when they want to cash in. To me, that is the biggest risk.