$1 trillion in capital flows out of China since summer 2014

China has seen nearly $1 trillion (€915 billion) in capital leave the nation since the second quarter of 2014, and according to analysts at JPMorgan Chase, the sky’s the limit for outflows going forward.

The causes of these massive capital outflows, which have prompted the People’s Bank of China to tap the country’s war chest of reserves to support the currency, have grown more numerous in the second half of 2015, argues a team led by managing director Nikolaos Panigirtzoglou.

Amid the broadening of sources of downward pressure on the yuan, however, a major factor that may have restrained the central bank from devaluing the currency in a big way has vanished.

“The Chinese capital outflow picture appears to have entered a new phase in [the third quarter], broadening to include foreign direct investment and portfolio instruments, something that could make future capital outflows practically boundless,” writes the JPM team.

Net foreign direct investment in China rose by $7bn in the third quarter, its lowest level since 2000, with gross inflows falling precipitously compared to the second quarter.

Meanwhile, foreign investors divested a net $17bn worth of Chinese stocks and bonds over that same span.

The stock of foreign ownership of these two categories totals over $3.6 trillion as of the third quarter of 2015, according to JPMorgan’s calculations.

JPMorgan chief China economist Zhu Haibin had previously observed that Chinese corporates’ attempts to reduce US dollar liabilities at a time in which softness in the yuan was in the offing was a major source of capital outflows.

Foreign currency loans outstanding amounted to almost $400bn at the end of the third quarter — on the face of it, there is plenty of room for Chinese firms to continue to dial down.

But Chinese corporates have also been working to reduce asset-liability mismatches by piling up more foreign assets along with paying back foreign currency debt.

“While the accumulation of foreign currency or dollar deposits represents a capital outflow and thus puts downward pressure on the Chinese currency versus foreign currencies, it also increases the share of foreign currency debt that is hedged,” JPM’s team explains.

“The implication is that, of the $387bn stock of foreign currency loans, only a small portion is unhedged and thus vulnerable to further unwinding, especially after taking into account [the fourth quarter] which likely saw further progress towards hedging foreign currency debt.”

Worries about the depreciation of the yuan and Corporate China’s balance sheet may subside.

JPM said “the low overall net foreign exchange exposure by Chinese corporates and banks removes one hurdle in terms of Chinese authorities allowing a larger and faster depreciation from here.”


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