China ran a balance of payments deficit of $80bn in the first three months of the year, the largest quarterly net outflow on record, according to official data.
The outflows are all the more striking because China’s trade surplus remained strong over the period. As falling commodity prices slashed the country’s
But this was overwhelmed by outflows on the capital and financial accounts worth a record $159bn. The lure of China's surging stock market also failed to counter the outflow trend.
Although the outflows signal investor concern
"All things considered, [Beijing] would rather not have confidence-sensitive capital going out," said Tim Condon, head of Asia research for ING Financial Markets in Singapore.
By some measures, outflows have been continuing for more than a year. The central bank’s holdings of foreign assets have dropped for seven consecutive quarters — the longest run of declines on record.
Still, economists say the scale of outflows does not yet threaten the stability of the financial system. That first-quarter outflows set a record largely reflects the tight control Beijing has long maintained over cross-border capital flows.
And even if the $80bn quarterly outflow were maintained for the entire year — an unlikely scenario — it would still represent only 3 per cent of 2014 gross domestic product and 9 per cent of foreign exchange reserves. That explains why Chinese officials do not appear overly concerned.
“Recent capital outflows represent an adjustment that is within expectations. One can’t equate them with illegal and secret capital flight,” Guan Tao, head of the balance of payments department at the State Administration of Foreign Exchange, said last month.
According to analysts, it is also
“China has a huge manufacturing sector and it’s looking for places to do business cheaper. That’s cold money — there are goods and services associated with it,” said Mr Condon.
Aided by the government’s “going out” policy encouraging overseas investment by Chinese companies, China ran an FDI deficit of $33m in 2014, the first full-year FDI deficit since 2004, according to the foreign exchange regulator.
Beyond FDI, economists say even some purely financial flows should be considered a healthy move by Chinese savers to diversify into foreign assets, rather than a sign of panic
They also reflect recent reforms to loosen capital controls and cautiously encourage financial outflows through initiatives such as the Shanghai-Hong Kong Stock Connect, which allows mainland Chinese to invest in foreign equities.
Nevertheless, capital outflows are complicating efforts by the People’s Bank of China to support the economy through monetary easing. For the past decade, central bank purchases of foreign exchange inflows were the main source of base money creation in China's banking system. Now, with outflows threatening to shrink the money supply, the central bank is turning to new mechanisms to expand it
The most
Yet even after RRR cuts totalling 1.5 percentage points this year, the ratio for big banks, at 18.5 per cent, remains far higher than in any other major economy. Most economists believe that for the PBoC to meet its broad M2 money growth target of 12 per cent, further RRR cuts will be necessary.
“From the start of this year, capital inflows have been negative. We believe the key factor now restricting effective monetary easing is that the required reserve ratio remains at a high level,” said Liu Liu, macroeconomic analyst at China International Capital Corp.
In addition to RRR cuts, the central bank has slashed benchmark rates three times since November. But lower rates could exacerbate capital flight by making Chinese assets less attractive, especially in comparison to the US, where the Federal Reserve is expected to raise interest rates this year.