《【Note by TL】China#39;s Capital Flight》.docxVIP

Opening Remarks China’s Capital Flight By Peter Coy 10  Money is pouring out of China as rapidly as it once poured in. That’s a dilemma for Xi Jinping  You don’t need to be a finance expert to know that something’s wrong when an interest rate reaches almost 70 percent. With China’s growth outlook darkening and capital flowing out of the country, speculators have been betting heavily against the yuan. The People’s Bank of China effectively declared war on them in early January, directing state banks to buy large sums of the currency in Hong Kong to support its value and burn the short sellers. With the yuan sud- denly scarce in Hong Kong, the annu- alized cost of borrowing it overnight there hit 66.82 percent on Jan. 12—more than 10 times the usual interest rate. (It receded to 8 percent the next day.) Michael Every, head of financial markets research at Rabobank Group, called the rate spike “murderous” and predicted that things wouldn’t end well for Chinese authorities. Central banks “usually win a round like this, but lose in the end,” he told Bloomberg.  China’s central bank isn’t freestyling. It takes its instructions from the gov- ernment, which means President Xi Jinping. Xi has shrewdly consolidated power since his ascension in 2012, but he seems befuddled by free markets, at times allowing them to operate and at times trying to throttle them—as with the circuit breakers that have failed to arrest the slide in stock prices (page 38). One of the big questions for the global economy in 2016 is what Xi will do next to stop the flight of capital, which threatens to sap funds from China when growth is already weak. One option is to lure money back by making the country more inviting to both Chinese and foreign investors. That would involve decontrolling interest rates and halting directed lending to heavily indebted state-owned enterprises and local gov- ernments. But doing so would require loosening the Communist Party’s control over the economy and