Broker's View

China capital outflow to continue

Both individuals and companies want to diversify assets, market watchers said.

PUBLISHED : Monday, 02 May, 2016, 9:46am
UPDATED : Monday, 02 May, 2016, 1:35pm

China’s capital outflows will continue in the near term even in the light of an increase of foreign exchange reserves in March because both investors and companies want to diversify their assets, analysts said.

“We do not expect a quick reversal of capital outflows,” Standard Chartered analysts Ding Shuang and Yan Se said in a note.

China’s foreign reserves in March climbed by US$10.26 billion, the first monthly gain since November.

Chinese households are likely to diversify their investments and increase their foreign asset holdings, Ding and Yan said.

By the end of 2015, total Chinese outbound real-estate investment had reached nearly US$30 billion, twice that of 2014, as both individuals and institutions invested in Sydney, London and Manhattan to diversify their assets amid the depreciation of the yuan and stock market turbulence, research by property consultant Knight Frank showed.

A greater contributor of capital outflows is from mainland companies investing in and acquiring western firms. Chinese conglomerate Fosun Group said earlier this month.

It agreed to buy Dead Sea cosmetics manufacturer Ahava for US$77 million because it saw increased demand for personal care products in China.

The Chicago Stock Exchange agreed in February to be acquired by Chongqing Casin Enterprise Group, — a deal still pending regulator approval.

An increasing share of outbound flows is now focused on acquiring assets that provide long-term income, access to new markets and better technologies, rather than just mining and natural resources, a report by HSBC Global Research said.

“We believe China’s outward direct investment (ODI) will continue to grow despite — or even because of — the domestic economic slowdown as the country looks to diversify its savings into foreign assets,” the report said.

China’s non-financial direct investment overseas reached 261.74 billion yuan (HK$312.94 billion) in the first quarter of this year, up 55.4 per cent annually, the Ministry of Commerce said. In March, the newly added investment surged 21.5 per cent year-on-year to 66.4 billion yuan.

Nearly all of China’s ODI are settled in yuan, and this particular kind of capital outflow is an important channel for yuan’s internationalisation, the HSBC report said.

The depreciation trend of China’s “red back”, still, is the substantial driver for continuous capital outflow, Michael Every, Rabobank’s head of Financial Markets Research at Asia Pacific, said.

“This is a structural outflow that will stay until the onshore yuan finds a realistic level much lower than here, Every said. “Mergers and acquisitions will speed this process up.”