More Signs Of Deepening China Distress

By Henny Sender at The Financial Times

China’s foreign exchange reserves fell alarmingly in August, anywhere from $94bn to as much as $150bn according to various calculations. That was just another in a series of dramatic data points that are leading to an increasing sense both within the Middle Kingdom and without that all is not well.

For a long time now many hedge funds have been short Macau, once the main beneficiary of both the Chinese propensity to gamble and the rise of China as a market for luxury goods. Then the anti-corruption campaign put a big chill on the junkets to the former Portuguese enclave, as it did on sales of everything from Rolex watches to shark fin soup and abalone in top restaurants.

But now there is another strand to the story. Macau has long been one of the more porous parts of the wall meant to keep capital flows in and out of China under strict control. For example, those who wanted to get significant amounts of money out of China would purchase a dozen watches, using their renminbi credit cards, only to return the time pieces instantly and receive cash refunds, with a discount for the jeweller’s trouble. The currency would then be converted and go straight into bank accounts and investments abroad.

Today, the thesis of hedge fund managers putting on the Macau trade is that regulators will tighten up on such practices, causing further damage to Macau’s wounded economy.

Suddenly, the debate in China has shifted from a perception of too much money sloshing round and too many reserves earning meagre returns, to a concern about the adequacy of reserves given the extent of debt — much of

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