China capital outflows: as US battles inflation, Beijing goes on alert for ‘spillover effects’ from rate hikes

Foreign investors have dumped Chinese equities and bonds at a rapid pace over the past two months, while the yuan has come under strong depreciation pressure

The last time China experienced such severe capital flight came between 2015-17 and it was only halted by heavy capital controls and the release of forex reserves

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Capital outflows coupled with growing depreciation pressure on the yuan are stoking concern in Beijing about the stability of the domestic financial market. Illustration: Lau Ka-kuen

Published: 5:30am, 27 Apr 2022

As the US shifts to more aggressive rate tightening, concern is mounting in Beijing about capital outflows and growing depreciation pressure on the yuan. The question on many people’s lips: how prepared is China to deal with it?

Investors have withdrawn money from China at a rapid pace over the past two months, triggered by market expectations of further interest rate hikes by the US Federal Reserve, the Omicron outbreak and the Russia-Ukraine war.

Besides selling government bonds, foreign investors have dumped Chinese equities, resulting in a stock market rout that has prompted officials to pledge support for markets and the economy.

The “unprecedented” rate of capital outflows has alarmed officials in Beijing and led President Xi Jinping to warn of negative policy spillover from “some countries”.

The current US monetary policy adjustment is undoubtedly unprecedented in terms of scale and pace

Zhu Guangyao

The last time China experienced such severe capital exodus came between 2015-17, and it was only halted by heavy capital controls and the burning of a quarter of the national foreign exchange reserves.

Now, more cautious observers are warning that any misstep during the US Federal Reserve’s current rate cycle could come at a heavy cost to the Chinese economy.