Money moving out of China despite stable economic growth

The Chinese real gross domestic product (GDP) grew at 6.8 percent y/y in the last-quarter of 2016, registering a sixth consecutive quarter in which growth has been between 6.6-7.0 percent. On the contrary, money is moving out of China despite stable GDP growth over this period, as demonstrated by the USD1 trillion declines in the government’s FX reserves since mid-2014.

This last two years the China’s foreign inflows have softened, causing higher money outflow from the country. Also, the government is expected to depreciating Yuan for the foreseeable future, by a mixture of sales of its FX reserves and more stringent enforcement of capital controls.

Because net capital outflows have consistently exceeded the value of China’s current account surpluses beginning in 2015, the country has been running down its foreign exchange (FX) reserves. Although China still has a staggering amount of FX reserves, the value of those reserves has receded from nearly USD4 trillion in mid-2014 to about USD3 trillion at present, reported Wells Forgo in its research note, an American international banking and financial services provider.

That is, authorities have spent about USD1 trillion supporting the value of the Chinese Yuan vis-a-vis other currencies since mid-2014, a topic to which we will return later. Because net capital outflows have exceeded the value of the country’s current account surplus in recent years, the value of the Chinese Yuan would be significantly weaker than it is today if the Chinese government allowed the currency to float freely in FX markets, they added.

The Wells Forgo in its research note concluded that some of the outflows have been encouraged by government policy such as the liberalisation of the QDII program. But concern about the underlying state of the economy, expectations about the further depreciation of the Yuan, and rising rates of return in many foreign economies are probably contributing to the capital exodus as well.