China stems capital outflow after 22 months of bleeding money

China’s capital outflow finally stopped in September after a 22-month flight – a result that will increase Beijing’s confidence in handling turbulence should a hawkish US Federal Reserve raise interest rates.

The People’s Bank of China bought a net 850 million yuan (US$128 million) of foreign exchange in September, marking the first net increase since October 2015.

The figures marked victory for Beijing in battling capital exodus partly through enhanced capital account controls.

In over-the-counter foreign exchange transactions between banks and their clients, companies and individuals sold more to banks in China than they bought from the banks last month, according to data released by China’s State Administration of Foreign Exchange on Thursday.

The shift also reflected in an eight-month rise in China’s foreign exchange reserves.

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“Interest rate increases and balance sheet reduction by the Federal Reserve won’t fundamentally shake the general stabilisation of China's cross-border flows,” the foreign exchange regulator said in a statement, hours after the data were released.

The reversal of capital outflows into inflows, along with a strong 6.8 per cent growth rate in the third quarter, help to paint an upbeat picture of the world’s second biggest economy as President Xi Jinping hailed what he described as a “new era” of socialism with Chinese characteristics in his speech to the party congress on Wednesday.

Jing Ulrich, a managing director at JPMorgan, told a press briefing in Hong Kong on Friday that the general investor perspective on the Chinese economy has “become much more positive compared to the last year or the year before” after the Chinese government managed to keep growth on track.

Xie Yaxuan, chief economist with China Merchants Securities, expected no huge rise in foreign exchange purchasing positions because the central bank has reduced intervention in the market.

Xie predicted that the yuan would fluctuate with the US dollar in both directions this year, adding that the impact of Federal Reserve’s policy on China’s liquidity had eased.

Pan Gongsheng, the head of the State Administration for Foreign Exchange, said on the sidelines of the ongoing Party’s Congress on Thursday that China’s foreign exchange market had suffered “highly intensive” risks and shocks earlier this year, but currently the overall market situation has stabilised. He also expected the yuan to be become more flexible.

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Pan’s agency also said in Thursday’s statement that capital flows will remain stable and closer links with international financial markets would help facilitate foreign investment in the Chinese capital market.

Foreign investors’ confidence in China’s capital market has also improved. Their holdings of yuan-denominated bonds has increased over the past seven months, exceeding 1 trillion yuan at the end of September, setting a record high, according to the Shanghai Clearing House.

Wang Tao, chief China economist with UBS, said the yuan remained stable and forecast it would be traded at around 6.6 against the dollar by the end of this year and weaken slightly to 6.7 next year.

But she expected measures to restrict capital outflows to continue for a while and said the a full liberalisation of capital accounts would not occur in the next couple of years.

JPMorgan’s Ulrich told the briefing that China’s capital control measures, including those targeting outbound investments in property and luxurious hotels, will remain for “the foreseeable future”.