After nearly two years, China’s cash exodus could be coming to an end

Widely watched indicator from the central bank shows a smaller decline in yuan positions accumulated from foreign exchange purchases in August

PUBLISHED : Saturday, 16 September, 2017, 8:56pm
UPDATED : Saturday, 16 September, 2017, 10:27pm

China has been haemorrhaging funds for nearly two years but it could be coming to an end, according to a widely watched indicator released by the central bank.

Yuan positions accumulated from foreign exchange purchases fell 821 million yuan (US$125.36 million) in August – the 22nd monthly decline in a row, according to data published by the People’s Bank of China.

A drop in the figure means China has reported a net capital outflow – the bigger the drop, the larger the outflows.

But the decline in August was much smaller than the 4.6 billion yuan fall in July and the 34 billion yuan decrease in June – showing that the cash exodus is starting to wane.

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In the same month last year, yuan positions plunged by nearly 200 billion yuan. That compares to the 700 billion yuan decline at the height of China’s capital outflows in December 2015.

The trajectory of changes in yuan positions is in line with other indicators measuring capital flows.

The country’s foreign exchange reserves have gone up for seven consecutive months to August, when they were firmly above US$3 trillion.

Meanwhile, the yuan has gained about 6 per cent against the dollar so far this year. The central bank earlier this month tweaked the rules so that the yuan could weaken a bit against the US dollar.

Lu Lei, deputy chief of the State Administration of Foreign Exchange, said at a forum last week that China would continue to move towards a market-oriented yuan exchange rate policy mechanism, reflecting Beijing’s confidence in capital flows and the value of the yuan.

Becky Liu, head of China macro strategy with Standard Chartered in Hong Kong, wrote in a recent note that the Chinese authorities were feeling more comfortable about the exchange rate and reserves outlook thanks to “solid economic growth and subsiding capital outflow pressure”.

“These conditions may lead to a further unwinding of temporary measures to curb outflows and pave the way for the next round of financial reforms and yuan internationalisation,” Liu noted.

The Chinese government imposed draconian curbs on outbound payments and remittances at the end of last year and tightened foreign exchange purchases by individuals, although the annual quota of US$50,000 for every mainland citizen was not reduced.

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Mark Williams, chief Asia economist with Capital Economics, wrote in a note this week that Chinese policymakers would want to introduce more uncertainty on the outlook of the yuan exchange rate as “depreciation pressure has abated”.

Yuan positions accumulated from foreign exchange purchases have huge implications for China’s domestic monetary policy as well.

As the People’s Bank of China tries to defend the yuan, it buys every incoming dollar by issuing about 6.5 yuan. The issued yuan in turn becomes additional liquidity in the banking system. When funds leave China, it has a contracting effect on the country’s monetary supply.

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A 22-month net loss of funds has greatly lowered domestic money supply. China’s M2 money supply growth decelerated to 8.9 per cent at the end of August, the lowest expansion recorded since the monthly data became available in 1996. The growth rate was also far below the government’s target for 2017, which is 12 per cent.