Daily Management Review

How actions of the Chinese authorities are restraining the capital outflow


06/10/2016


The outflow of capital from China slowed in May, despite the weakening renminbi, reports the Washington-based Institute of International Finance. After two months of growth, China's reserves in May again fell by $ 28 billion to $ 3.19 trillion - and this is the lowest level since December 2011. However, this decrease is mainly obliged to the revaluation of non-dollar assets (in particular, weakening of the euro in May by 3%, and the Japanese yen - by 4%). Direct sales of foreign currency of the Central Bank of China amounted to only $ 3.5 billion – this is the smallest monthly volume for the last year.



pixabay
pixabay
So far, the volume of reserves exceeds the adequate need even in a situation of inefficient control on capital outflows. Magnitude of the gap, however, is being reduced, as follows from IIF data. The situation is greatly affected by ineffective supervision. In particular, this means that a significant overstatement of import declarations, which is estimated at 2% of total imports (for example, imports from Hong Kong in 2016, according to the documents, increased by 250%).

Net capital outflow from the country amounted to about $ 27 billion in May - a little less than in April. This is significantly less than at the beginning of the year, when outflows reached $ 100 billion - despite the fact that the renminbi weakening in May was similar to the January level (1.6% and 1.2% respectively). The outflow has been reducing since February due to the weakening dollar and the Fed's comments on the risks of the global economy, and a slower increase in interest rates. In May, the index has not grown because of the actions of the Chinese authorities to support growth (primarily through credit expansion). Designation of the renminbi against the basket of currencies also plays its part. For example, for the year the renminbi has weakened by 1.2% to the dollar, while the basket of currencies - by 4.7%. This affects expectations of economic agents, not allowing to bet unambiguously on the renminbi’s depreciation), believes the institute.

The net inflow of funds in China has not been observed for about two years - since May 2014, as can be seen from IIF calculations. At the same time, even the weaker currency was unable to support the growth of exports. In May, it decreased by 4.1% yoy (import - by 0.4%), from January to May compared to the same period last year, the decline amounted to 7.3 %, while imports fell by 10.3%. 

source: iif.com






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