China’s Worst Capital Outflow in Years Spells More Yuan Pressure

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

(Bloomberg) — 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 $49 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 US, 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 SA. 

A $188 Billion Exodus Shows China’s Heft Fading in World Markets

Of the $49 billion outflow from the capital and financial account last month, $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% 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.

Direct investment slipped to a deficit of $16.8 billion in August, the worst since early 2016. The balance has been negative since mid-2022 as the country’s Covid restrictions and a crackdown on the private sector kept investors away. China’s fragile recovery since Covid restrictions were lifted and a slide in consumer confidence means investment has been slow to return.

China has been running a perennial deficit in services trade since the number of mainlanders traveling overseas has outpaced the amount of visitors to the country. That trend has been aggravated as foreign tourists are yet to return in droves, even as the country has fully discarded its Covid restrictions. The deficit worsened last month amid a jump in outbound tourism during the summer holiday season.   

The Chinese currency has slumped more than 5% this year both onshore and offshore, marking the worst performance in emerging Asia after Malaysia’s ringgit.  

Still, capital outflows may slow to some extent as China’s economy shows some signs of stabilization, although much depends on the rates trajectory in the US and China, said Edmund Goh, investment director of Asia fixed income at abrdn Plc.  

“A lot of the money that was bearish on China’s growth and the yuan has left China in the past 12 months and we should start to see some stabilization in capital outflows,” he said.  

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