China’s Outflows Aren’t Over
Reserves rise despite yuan’s depreciation, but capital flight is still a concern
By Anjani Trivedi
Beijing seems to be exercising restraint in the face of chaos in global financial markets. For now.
China’s foreign-exchange reserves in June registered their biggest monthly increase in more than a year—up $13.4 billion to $3.21 trillion. This happened while the yuan fell almost 1% last month. The consensus was that reserves would fall, but the increase is likely because China holds fewer British pounds or more Japanese yen than expected. The rise was largely cosmetic with the Japanese yen climbing almost 7% last month.
By keeping to a predictable path of weakening the yuan, Beijing hasn’t sparked market panic as it did in January and in August of last year. It has also managed to slow capital flight.
One reason outflows have slowed is that companies seem to have paid down a fair amount of their foreign-exchange liabilities. That eases fears that a substantial depreciation could hurt China’s businesses. Another is that households are facing restrictions on taking money offshore.
But there are signs that more is flowing out than meets the eye. An estimated $170 billion of yuan has, according to Goldman Sachs, gone to the offshore Hong Kong market since last October. Put another way, since last October, about $500 billion net has flowed out. That is 50% more than the $330 billion implied by central bank data, according to Goldman Sachs.