Beijing Chalks Up a Win In Its Fight Against Capital Outflows

Подписывайтесь на наш канал @east_veter :)

Beijing can declare mission accomplished in its battle to keep money at home–at least for now.

A study to be released on Thursday by the Washington-based Institute of International Finance shows that net capital outflows from China reached $60 billion last year, less than one-tenth of 2016’s net outflows of $640 billion. The analysis adds to evidence, which also includes continued increases in China’s foreign-currency reserves and a surging yuan, that China has largely succeeded in curbing capital flight in the past year.

A combination of factors has contributed to what analysts at the institute call the “great moderation” in Chinese outflows. They include tighter capital controls, which have made it harder for money to leave China; higher domestic interest rates, which have discouraged bets against the yuan and made Chinese assets more attractive; and improved economic growth, which has encouraged businesses and individuals to keep money onshore.

Another factor is the unexpectedly prolonged softening of the dollar. Thanks to the weakening greenback, the Chinese yuan, which finished 2017 up 6.7%, is roaring again. In mainland trading this week, it has risen to the strongest level since its surprise devaluation in August 2015. The yuan fell in early trading Thursday to 6.297 per dollar.

Such a fast appreciation of the yuan isn’t in China’s interest, government advisers and analysts say, as it could lead to speculative fund flows from overseas and add to asset bubbles that the authorities are trying hard to control. A stronger yuan could also hurt Chinese exports as trade tensions rise with the rest of the world, particularly the U.S.

Now that outflows have eased, Beijing could gradually relax restrictions on money leaving to help stem the yuan’s rise. Complicating any such move is the need for China to clean up its financial sector, which a retired finance minister recently said is in worse shape than the U.S.’s before the global financial crisis. Any sudden rush of money out of China could cause a liquidity crunch that might exacerbate the sector’s problems.

Indeed, Chinese companies and individuals are still seeking to circumvent government controls to take money out, a sign of instability much dreaded by the authorities. The institute’s study finds that such capital flight amounted to $210 billion last year, which it says still made up a “large portion” of outflows from China.

What helped Beijing narrow net outflows last year was the fact that foreign investors poured an estimated $155 billion into Chinese stocks, bonds and other assets, the analysis shows. That was in turn partly due to the effort by China’s central bank to guide short-term rates higher to help keep money at home.

Other proof that China has managed to tame outflows is a $142 billion increase last year in China’s foreign-exchange reserves, which reached $3.14 trillion as of December. Dubbed the “blood and sweat” of China’s domestic laborers, the stockpile of official reserves—the world’s largest—is seen as a key tool in Beijing’s arsenal to preserve financial stability.