China’s worst capital outflow in years spells more yuan pressure

8 months ago 78

SHANGHAI - China is witnessing the biggest flight of capital in years, creating concern for authorities as it worsens pressure on the beleaguered yuan.

The currency has been hammered from all fronts as money leaves its financial markets, global companies look for China alternatives and a revival in overseas travel hits services trade. All of this is captured in the latest official data, which shows an outflow of US$49 billion (S$66.8 billion) in the capital account last month, the largest since December 2015.

The exodus, spurred by sputtering growth in the world’s second-largest economy and a widening interest-rate gap with the United States, helped push the yuan to a 16-year low. The risk is that the currency weakness further saps the market’s appeal and results in an acceleration of outflows that can destabilize financial markets.

That was the case in the aftermath of a shock currency devaluation in 2015 and during China’s trade war with the US under the Trump administration, when Beijing needed to tighten capital curbs and boost the yuan’s funding cost in Hong Kong. While authorities have also taken various steps to stem the currency’s weakness this time around, the outflow trend looks hard to reverse.

“Due to the divergence in monetary policies and the current macro environment, it is unlikely that China has reached the turning point with enough incentives to attract capital back,” said Gary Ng, a senior economist at Natixis.

Of the US$49 billion outflow from the capital and financial account last month, US$29 billion came from securities investments, according to data from the State Administration of Foreign Exchange. While inflows have picked up, an even larger amount fled to push the balance deeper into the red.

The flight comes as Beijing runs the risk of missing its economic growth target of around 5 per cent for the year amid an ailing property market and slumping exports. Foreign investors’ ownership of Chinese sovereign bonds fell to a four-year low in August, while they ditched a record $12 billion of mainland shares in the month.

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