Capital outflows from China pick-up in November

Capital outflows from the People’s Republic of China picked up significantly in November, but that does not foreshadow a “significant” weakening in the currency, according to one think-tank.

The value of the country’s foreign exchange reserves in US dollars declined by $87bn in November to $3.438trn, (consensus: $3.493trn), as the central bank sold reserves to limit the downward pressure on its currency.

Fluctuations in FX markets explained about $30bn of the drop in the value of those reserves, Capital Economics’ Julian Evans-Pritchard estimated.

Even so, net capital outflows probably picked up from $37bn in October to $113bn, Evans-Pritchard said.

The main driver for the exodus of capital appeared to have been the greater expectations that the yuan would depreciate further.

A rise in offshore interest rates due to the increase probability that the US Federal Reserve would hike rates when it met on 15-16 December probably also added to the outflow pressures, the economist explained.

However, Capital Economics believed the People’s Bank of China would not allow a significant depreciation, because it could hamper greater take-up of the yuan in international transactions, one of its stated aims.

It could also slow the process of rebalancing the economy towards domestic consumption.

Likewise, the nature of China’s capital controls – which are porous – meant the PBoC did not need to choose between allowing the currency to weaken and restrictions to its handling of monetary policy, Evans-Pritchard explained.

Standard macroeconomic theory holds that in the face of free capital flows a central bank cannot aim to both keep a fixed exchange rate while retaining control over its monetary policy decisions.

“Indeed, the PBoC has managed to keep interbank rates low and broadly stable over the past few months by using its monetary policy tools to offset the liquidity withdrawals from its FX sales.”