China’s capital outflows increase for fourth straight month

In August, $51bn left the mainland, according to Standard Chartered estimates, as authorities increased support for the mainland currency, which is under devaluation pressure.

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“Recent hawkish talks by Fed officials appear to have increased expectations of Fed rate hikes, putting pressure on the Chinese yuan,” the bank said in a research note.

In addition, the “PBoC appears to have increased intervention in August to keep USD-CNY below 6.7″ before the official inclusion of the yuan in the IMF’s special drawing rights basket in October.

The last time China had capital net inflows was in April 2014, when $3bn came in, according to Standard Chartered data.

Capital outflows reached a record -$149bn in December 2015.

The bank expects capital outflows to continue this month due to rising expectations of a December rate hike in the US. “China’s capital outflows appear to have been highly correlated with market expectations of Fed rate hikes and USD strength/weakness.”


 2016   Non-FDI outflows (US$bn) 
Dec (2015)   -$149
Jan  -$143
Feb  -$42
Mar  -$34
Apr  -$24
May  -$35
June  -$43
July  -$50
Aug  -$51


Source: CEIC, Standard Chartered Research


In a separate report, the bank surveyed corporate and investor clients in Hong Kong, Taiwan, China, Korea and Singapore from 29 August-8 September. They had a pessimistic view, expecting an even weaker yuan this year.

“The popular view is that a cheaper  CNY supports exports and that exports are key to growth; locally, the expectation is that the sizeable capital outflows seen recently will continue.”

The bank’s view differs. It expects the US dollar and yuan to range trade this year because in the short-term the government does not want CNY weakness versus the US dollar beyond 6.70.

China’s surprise devaluation of the yuan last year rocked global markets. The currency is widely expected to continue to depreciate but in a more gradual manner. According to the Bank for International Settlements, the real effective exchange rate of the renminbi remains nearly 25% overvalued.

Big investment impact

A falling yuan versus the dollar has wide investment implications.

It will impact on domestic bond returns unless the currency is hedged properly, FSA reported earlier.

In equities, it could put downward pressure on corporate earnings in Asia.

A weakening currency means China’s imports become more expensive, potentially worsening a slowdown of imports from regional trading partners.

Deutsche Asset Management pointed out that “China remains the largest trading partner for many countries in the Asia-Pacific region, particularly for Australia (34% of exports) and South Korea (26%). The impact of China’s declining import demand is most acutely felt in South Korea where exports have been declining for more than 18 months.”

A falling yuan could also cause a race to the bottom in regional currencies as each country seeks to maintain export competitiveness.

In wealth management, the falling yuan is pushing mainland high net worth investors to get more of their wealth into offshore assets, according to several weatlh managers including Noah, Standard Chartered and UBP.


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