17 June 2018
The market expects the renminbi to continue to depreciate. Photo: Reuters
The market expects the renminbi to continue to depreciate. Photo: Reuters

As much as US$1.9 trln has fled China over the last two years

The Chinese authorities have released various measures to stem capital outflows.

However, capital continues to flee the country through different channels.

The US Federal Reserve started tapering its quantitative easing in 2014, and that opened the Pandora’s Box.

Massive capital has been flowing out of emerging markets, and China has suffered the most.

How much capital has left China in the last two years?

There are two ways to calculate that.

First, the difference between China’s 12-month foreign exchange reserves and net exports started to fall in the second quarter of 2014. That means less capital flowed into China.

The gauge turned negative in the third quarter of 2014 and has recorded continued capital outflows until now.

By May this year, over US$1.9 trillion of capital has fled from China, almost half of the country’s record US$4 trillion in foreign exchange reserves in 2014.

Meanwhile, Bloomberg’s calculation of foreign exchange purchases from central bank and foreign exchange deposits minus the monthly trade surplus and direct investment also show that hot-money flows into the country cooled off in 2014.

The figures swung to a net outflow starting in November 2014. By April this year, China’s hot-money outflows totaled US$1.5 trillion over the last two years.

The two calculations give slightly different figures, but the overall trend remains the same.

That means US$1.5 trillion to US$1.9 trillion of capital has left China over the last two years, equivalent to 15-18 percent of China’s gross domestic product in 2014.

The capital outflows seem to have eased in recent months.

Does this mean the worst is already behind us?

Various data shows that money continues to flee China through different channels.

Offshore insurance policies are one of the main channels for rich Chinese to take money out of the country.

New policies purchased by mainland Chinese reached HK$10.5 billion (US$1.35 billion) in the last quarter of 2015 and HK$13.2 billion in this year’s first quarter, figures from the Office of the Commissioner of Insurance show.

Mainland Chinese paid a total of nearly HK$60 billion in premiums for existing and new policies in the first quarter, a staggering jump of nearly 50 percent from a year earlier.

Also, China’s imports from Hong Kong surprisingly surged to US$2.06 billion in April, double the figure from a year earlier, and US$2.48 billion in May, 2.4 times the figure from a year earlier.

However, China’s overall imports dropped in April and May.

In May, Hong Kong’s exports fell 4.8 percent and re-exports to China fell 4.6 percent.

So, the surging figures for China’s imports from Hong Kong do not make sense.

This implies that some Chinese companies used fake import orders to cover up outflows of capital.

China’s red-hot outbound merger and acquisition deals are also a key channel for outflows.

As of June 14, Chinese companies have spent a record high of US$270.5 billion in outbound deals over the last four quarters.

It seems China’s capital outflows have yet to come to an end.

Various government measures have helped ease the outflows but are unlikely to reverse the trend.

Moreover, the strength of the US dollar has put increasing pressure on the renminbi.

Bloomberg figures, based on China Foreign Exchange Trade System data, show a drop in the renminbi of 5.5 percent since Dec. 11, while the official daily fixing only fell 2.5 percent over the period.

That indicates the Chinese currency may have further downside.

How should Beijing react to that?

It has two options.

First, it could further tighten capital controls and restrict capital outflows.

Second, it could introduce another one-off depreciation, or let the renminbi weaken to more than 7 to the US dollar.

That could resolve the market’s long-held expectations that the Chinese currency will depreciate.

This article appeared in the Hong Kong Economic Journal on June 16.

Translation by Julie Zhu

[Chinese version 中文版]

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Hong Kong Economic Journal chief economist and strategist

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