China’s capital conundrum: US Fed hikes and geopolitical strife add fuel to yuan exodus

After another interest-rate hike by the US Fed, and with more to come, China’s central bank is looking to prevent a rapid depreciation of the yuan

Some analysts are calling for Beijing to maintain flexibility in the yuan’s exchange rate, even after it recently crossed a key psychological line of 7.0 yuan to the US dollar

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US Federal Reserve Board Chairman Jerome Powell on Wednesday announced yet another aggressive interest rate hike. Photo: AFP

Published: 8:30pm, 22 Sep 2022

A steady stream of capital outflow from China poses a growing challenge to Beijing and emerging economies that are already struggling to cope with faltering economic growth and a rapid strengthening of the US dollar, according to analysts.

The US Federal Reserve’s third-straight 75-basis-point rate hike on Wednesday raised benchmark interest rates to the highest level since 2008 and further widened the monetary policy gap between the world’s two largest economies.

And with a fourth rate hike possible in November, the pressure on Beijing looks to keep mounting as it strives to prevent both excessive yuan depreciation and a massive exodus of capital.

Between February and July, China suffered a record net outflow of US$81 billion via the Stock Connect and Bond Connect mechanisms, according to data from the Institute of International Finance (IIF). The outflow moderated a bit in August, with foreign investors trimming their holdings in Chinese bonds by 30 billion yuan (US$4.24 billion), according to data from the People’s Bank of China (PBOC).

In total, emerging markets in August posted their first month of inflows – totalling US$27 billion – after five consecutive months of outflows, according to the IIF. In July, net portfolio outflows from emerging markets reached US$9.8 billion.