China records sharp rise in capital outflows

The jump in forex sales to 17.4 billion yuan points to worries the yuan may depreciate

PUBLISHED : Wednesday, 19 September, 2012, 12:00am
UPDATED : Wednesday, 19 September, 2012, 2:57am

Figures released yesterday indicate capital outflows from the mainland have accelerated, possibly because of expectations the yuan will depreciate as economic growth decelerates.

The central bank and commercial banks sold a net 17.4 billion yuan (HK$21.3 billion) in foreign exchange last month, compared with net sales of 3.82 billion yuan in July.

However, economists say the trend may reverse after the Federal Reserve launched the third round of quantitative easing to stimulate the US economy, which may weaken the US dollar and prompt funds to flow into emerging markets such as China.

Data released by the People's Bank of China yesterday showed outstanding yuan positions at financial institutions accumulated from foreign exchange purchases fell to 25.64 trillion yuan at the end of last month from 25.658 trillion yuan a month earlier, indicating net sales rose.

"The primary reason that spurred the capital outflows was the expectation the yuan would weaken further," said Ken Peng, a senior economist at BNP Paribas.

Monthly capital outflows during the April-July period averaged about 200 billion yuan, taking into account foreign direct investment and the trade surplus, Peng said. This contrasted with the continuous inflows of foreign exchange in the past decade, when the economy soared an average of 10 per cent each year.

Growth in industrial output slowed to the least in three years last month, while exports grew little as external demand cooled fast and domestic industries suffered from excessive capacity.

Daiwa Capital Markets noted that the yuan has depreciated by 1 per cent against the US dollar since May, "driven by concerns about the near-term risks of an economic hard landing, the potential bursting of the property price bubble and the poor stock market performance".

China's foreign exchange reserves fell by US$11.2 billion in the second quarter, the first decline since 2000, it said.

However, economists expect the yuan may get a boost in the short term after the Fed said last week it would buy US$40 billion of mortgage-backed securities a month to help create jobs.

"QE3 may cause a reversal in capital flows, as investors may move funds to China to chase higher yields," said Helen Qiao at Morgan Stanley.

Wang Qinwei, an economist at Capital Economics, said the size of the outflows was not big enough, and people did not need to panic despite having seen steady foreign exchange inflows for many years.

In addition, "not all of this is speculative capital. For example, the outflows may be the result of strong outward investment - we already know this rose 53 per cent in the first seven months of this year".