China capital outflows hit record S202b in August on yuan weakness

An employee at a currency exchange store counts Chinese one-hundred yuan banknotes in Hong Kong, China, on Aug 12, 2015.
An employee at a currency exchange store counts Chinese one-hundred yuan banknotes in Hong Kong, China, on Aug 12, 2015. PHOTO: BLOOMBERG

BEIJING (BLOOMBERG) - Money is leaving China faster than ever, according to a Bloomberg gauge tracking capital flows.

An estimated US$141.66 billion (S$201.7 billion) left China in August, exceeding the previous record of US$124.62 billion in July, data compiled by Bloomberg show.

The gauge of so-called "hot money" is an estimate of the sum of foreign exchange purchases by banks and the change in foreign exchanges deposits to measure flows into the country. The monthly trade and direct investment balances are netted out for an estimate of portfolio flows. An exporter choosing to keep foreign earnings offshore would show as a capital outflow.

The capital flight came as the People's Bank of China shocked global markets by devaluing the yuan on Aug 11, triggering a worldwide drop in commodities, equities and emerging-market currencies. Chinese Premier Li Keqiang tried to soothe investor concerns this month by calling his country a global growth engine instead of a source of risk, while President Xi Jinping has stuck to a similar script while on his first state visit to the U.S. this week.

"My worry is that, given the relatively large economic downward pressure, as China is opening up the capital account, it means more money will leave China," Huang Yiping, a PBOC adviser and Peking University economics professor, said on a World Economic Forum panel discussion this month in Dalian, China. "If there's an overall capital outflow in the future, it will bring depreciation pressure."

August outflows probably increased to US$178 billion, Goldman Sachs analysts led by senior China economist MK Tang at wrote in a note this month. A potential source may be Chinese companies reducing foreign-exchange liabilities by repaying debt in other currencies and taking advantage of lower domestic funding costs, they said.

A Federal Reserve interest rate increase would likely boost the value of the US dollar, making debt denominated in the currency more expensive to repay. Fed chair Janet Yellen said in a speech on Thursday that the US central bank is on track to raise interest rates this year, even as she acknowledged that economic "surprises" could lead them to change that plan.

President Xi, in a written interview with the Wall Street Journal this week, cited three reasons for the recent drop in reserves: a transfer of some foreign exchange assets from the PBOC to domestic banks, rapid growth in outbound investment by domestic enterprises, and local companies reducing overseas financing.

The Chinese government is working to enhance capital controls. China's State Administration of Foreign Exchange has told banks they must conduct special checks of foreign-exchange trading under capital accounts, according to people familiar with the matter.

China is trying to open its capital account enough for the yuan to win reserve status from the International Monetary Fund, while also trying to curb an exodus of funds from an economy set to expand at the slowest pace since 1990. Chinese investors are seeking to diversify in overseas assets after stocks tumbled more than 40 per cent from this year's peak on June 12.

To defend the yuan from weakening too sharply, the central bank has used foreign-exchange reserves to buy yuan. As a result, China's stockpiles of reserves recorded the biggest-ever drop in August. Expectations that the U.S. will raise rates for the first time since 2006 this year are also luring funds from China, complicating PBOC policy making.