China FX Outflows Soar As Beijing Prepares For Next Currency Devaluation, Priming Next Bitcoin Doubling

Back in October 2023, when we pointed out that China’s FX outflows had just hit a whopping $75BN - the single biggest monthly outflow since the 2015 currency devaluation – we concluded that the “unfavorable interest rate spread between China and the US will likely imply persistent depreciation and outflow pressures in coming months”, or in other words, “September’s biggest FX outflow in years is just the beginning, and very soon – in addition to geopolitics and central banks – the world will also be freaking out about the capital flight out of China… not to mention where all those billions in Chinese savings are going and which digital currency the Chinese are using to launder said outflows.”

We wrote that on October 20, 2023, when Bitcoin was trading just under $30,000, a level it had been for much of 2023. And, just as we correctly predicted at the time…

Clockwork: every time China FX outflows surge, bitcoin erupts.

From last Friday: China Capital Flight Panic Eruptshttps://t.co/j0eWLnbFMq

— zerohedge (@zerohedge) October 24, 2023

… following this surge in Chinese FX outflows, bitcoin – traditionally China’s preferred means to circumvent Beijing’s great capital firewall since gold is, how should one put it, a bit more obvious when crossing borders - promptly soared more than 100% in the next 4 months.

That was just the start, because only a few months later, in July 2024, we wrote the follow up as China’s capital flight returned with a vengeance, namely “China FX Outflows Soar As Beijing Dumps Record US Securities, Priming Next Bitcoin Surge” which coincided with a Reuters report according to which, it was China’s massive wall of inert capital that has been one of the key drivers of bitcoin moves, and never more so than during periods of FX and capital outflows which usually precede some form of capital controls… which regular (and hopefully very rich) readers will of course, recall has been our core, and unwavering, bitcoin thesis since 2015!

In any event, the sharp resumption of Chinese capital outflows, which we also highlighted in July, is why we also predicted at the time that “almost a year after our first correct prediction that China’s spike in FX outflows would send bitcoin surging, it’s time to do it again.”

You’ll never guess what happened next! And in case you really can’t, here is the answer: bitcoin exploded again, nearly doubling again over the next 5 months!

We bring all this up because more than a year after our first correct prediction that China’s spike in FX outflows would send bitcoin surging, and almost six months after our second correct prediction that China’s spike in FX outflows would send bitcoin surging (sic), it’s time to do it again.

One wouldn’t know it, however, if one merely looked at the official Chinese FX reserve data published by the PBOC, here nothing sticks out. In fact, at $3.2 trillion, reported Chinese reserves are now near the highest level in past nine years, and monthly flows are very much stable as shown in the chart below, with the latest month indicating a modest uptick in Fx reserves.

The problem, of course, is that as we have explained previously China’s officially reported reserves – and any official economic “data” for that matter – are woefully and purposefully inaccurate.

Instead, if one uses our preferred gauge of FX flows, one which looks at i) onshore outright spot transactions; ii) freshly entered and canceled forward transactions, and iii) the SAFE dataset on “cross-border RMB flows, we find that China’s net outflows were a massive $82 billion in January, which is a staggering burst of capital flight, one larger than the spike in FX outflows we first highlighted in October 2023, and the second biggest going back all the way to the great Chinese devaluation of 2015!

The data shows roughly equal contributions from both the current account channel showed, which sizeable FX outflows in January, as well as what has been dubbed “unusual cross-border RMB flow.”

Here are the details: in January, we saw $42bn in net outflows via onshore outright spot transactions, and slight outflows via freshly entered and canceled forward transactions. Another SAFE dataset on “cross-border RMB flows” showed outflows of $40bn in the month, suggesting net receipts of RMB from onshore to offshore. Combined, our preferred FX flow measure therefore suggests $82 billion in net FX outflows in January, in comparison with US$8bn net FX outflows in December.

The current account channel showed sizable net outflows (US$21bn in January vs. US$2bn inflows in December). There was a net inflow of US$14bn related to goods trade in January vs. an inflow of US$35bn in December. While we do not yet have the January goods trade data (which will be released along with February trade data in March), historical patterns suggest a larger January trade surplus when the Lunar New Year date is earlier than usual like this year. The smaller inflows therefore imply that goods trade surplus FX conversion ratio likely declined in January from 33% in December. The FX outflows related to services trade deficit edged up to $33bn (vs. an outflow of $32bn in December). The income and transfers account showed outflows of US$2bn in January, slightly higher than the US$1bn outflows in December.

Turning to the far more important portfolio investment channel (which is where crypto flows tend to be located) we find net FX outflows in November (US$0.2bn in January vs. US$1.3bn outflows in December). Bond Connect flows showed US$3bn outflows vs. US$2bn inflows in December. The cross-border RMB outflows might be partly due to the US$16bn Southbound flows from onshore to offshore, though this is not captured by the portfolio investment channel of FX settlement.

Meanwhile, as noted above, the official FX reserves (released earlier in the month) edged up to US$3,209bn in January from US$3,202bn in December. One possible explanation for this odd divergence is that FX valuation effects raised FX reserves by $5bn in January, so after adjusting for FX valuation effects, FX reserves increased US$1bn. In addition, Goldman notes that commercial banks’ net external assets rose by US$15bn in January (vs. a US$72bn increase in December

Luckily, there is a simple “sanity check” way to confirm that the capital inflows story is propaganda, and China is once again suffering another scorching period of capital flight: just look at FX. Indeed, after after the yuan surged in the fall, coinciding with a period of relative dollar weakness, since October we have seen a surge in the USDCNH spot, as one would expect when there is capital flight, most likely driven by rising fears of Trump tariffs and the implicit devaluation the yuan would suffer in order to offset tariffs which according to Trump would start around 10% and likely rise much higher.

But wait there’s more.

Where the capital flight story gets really interesting, is when we look at what Chinese public and private entities were doing with US assets according to official Treasury data. What we find is that according to Treasury International Capital data, in December Chinese investors sold $14BN in US securities (bonds, MBS, corporate bonds, and stocks), and more notably, following a record sale in May, China has been a constant seller of US securities in the past 6 months!

So if one had to guess what was going on, as the yuan slumped in October, November and December (before a modest bounce on unfounded hopes that Trump’s tariffs will be far less punitive than expected) as the capital flight resumed, the hit to the yuan would have been even bigger had China not liquidated a record amount of US securities starting in May, while the PBOC was buying much more gold, and while China’s middle and upper classes were quietly buying up bitcoin through Macau and other illicit venues.

And while Chinese policymakers are still keen on maintaining FX stability (or at least create that impression) as the countercyclical factors in the daily CNY fixing remained deeply negative and front-end CNH liquidity tightened notably in recent weeks, the reality is that with China desperate to boost its exports at a time when its great mercantilist competitor, Japan, has hammered the yen to the lowest level in 3 decades, it is only a matter of time before the currency devaluation advocates win, as they did in 2015. No surprise that the biggest China-related story in recent months came from Reuters, and reported that Beijing in already planning how to devalue the yuan in response to Trump tariffs. And if you really want to see what capital flight from China really looks like, just wait until we get another 2015-style “one-time” devaluation.

As an aside, we hope we don’t have to remind readers that the first big trigger for bitcoin’s unprecedented eruption higher starting in 2015 was – you guessed it – China’s August 2015 FX devaluation, as we correctly noted at the time when we predicted that bitcoin would explode from $250 to the thousands; in retrospect we were very conservative.

So don’t be surprised if in the next 6 months Bitcoin doubles again – for the third time in the past year – and the move has little to do with ETF inflows, the halving, a pro-crypto Trump administration, or frankly anything else taking place in the US, and instead is entirely driven by China’s massive wall of money which at last check was almost 3x bigger than the US.