China’s capital outflow problem still a ‘grey rhino’ despite signs of stabilisation
Foreign exchange reserves have been rising steadily, but capital outflow pressures are expected to remain high
Juliana Huang, a senior executive with a multinational company in Beijing, invested well during the property boom in the Chinese capital and over the years has owned several flats in the city.
Like many Chinese investors, however, Huang has in recent times sought to liquidate some of her investments and move the funds overseas, in the belief they will be safer there. Her market of choice is the US, where she now holds a healthy portfolio of stocks and funds, all denominated in US dollars.
The desire among China’s wealthy to convert their yuan-based assets into foreign currencies has been a headache for Beijing. But despite its efforts to curb capital outflows, the problem has become one of the “grey rhino” risks to the economy that are considered too big to ignore.
China’s foreign exchange reserves rose for a sixth straight month in July, suggesting Beijing’s efforts to slow capital outflows and boost inflows were paying dividends. However, an economist said the growth in the figures should not be overplayed.
“The rise in foreign exchange reserves is partly a result of currency valuation changes in the portfolio,” said Wang Tao, chief China economist with UBS. “A rise in reserves doesn’t mean a net capital inflow.”
While the government does not release the currency structure of its reserve portfolio, it is generally estimated that the US dollar accounts for about two thirds of the US$3 trillion stockpile.
Thanks to a weakening greenback, the yuan has gained steadily against the US dollar this year. The movement is also likely to have led to an appreciation in assets dominated in euros and yen, resulting in a nominal rise in the nation’s foreign reserves.
Xie Yaxuan, chief economist with China Merchants Securities, estimated that the valuation change contributed to a nominal rise of US$29.1 billion in July, which in effect means China’s reserves fell by US$5.2 billion in the month.
Similarly, if measured by the Special Drawing Rights – the accounting unit used by the International Monetary Fund – China’s reserves have fallen in each of the past five months, from 2.2196 trillion SDR at the end of February to 2.1884 trillion at the end of July, according to data released by the People’s Bank of China.
Another measure of capital flow, namely yuan positions resulting from foreign exchange purchases, has been in decline for 21 months, indicating a steady capital outflow. The better news for Beijing is that the fall in July was only 4.6 billion yuan, down from 34.3 billion in June.
Despite disciplining some of the country’s big global deal makers, including Dalian Wanda Group, HNA Group and Anbang Insurance, earlier in the year for their lavish overseas spending, the government still has a long way to go to stem the outward flow of investment.
Lu Zhengwei, chief economist with Industrial Bank in Shanghai, said the outflow pressure in the second half of 2017 “will be bigger than the first half”.
Earlier this month, Yu Yongding, an outspoken economist with the Chinese Academy of Social Sciences and a former adviser to the central bank, said that China has been facing serious capital flight for years and that the chronic problem is unlikely to go away any time soon.
Huang certainly has no plans to stop moving her money out of the country. She even hinted at ways to bypass the limit of US$50,000 worth of foreign currency that Chinese citizens are allowed to buy each year.
If a further 60 million Chinese thought like her, and each exercised their right to purchase exchange their maximum allowance of foreign currency, China’s US$3 trillion in foreign exchange reserves would be wiped out overnight.