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China Capital Outflows No Cause for Alarm

China Capital Outflows No Cause for AlarmChina Capital Outflows No Cause for Alarm

Massive capital outflows from China over the past four quarters have been viewed as a symptom of the moderation in growth prospects for the world’s second-largest economy and a possible cause of further weakness.

According to JPMorgan chief China economist Zhu Haibin, capital outflows—the net amount of assets leaving China—totaled $450 billion in the past four quarters, after adjusting for changes in the valuation of foreign exchange reserves. “The magnitude and the duration of capital outflows are unseen in China,” the economist writes, Bloomberg reported.

The simple inference that can be made from these headline figures is that assets are leaving China en masse, in search of superior returns elsewhere; the money that flowed in during boom times has reversed course. Capital outflows can become a big problem when they reduce domestic liquidity and, in the case of full-fledged capital flight, foster a sharp depreciation in the currency.

But in analyzing and decomposing the nature of these capital outflows, economists have concluded the picture is considerably more nuanced—that the reasons these assets moved out of the country are not cause for alarm. Much of the capital outflows can be attributed to seemingly prudent management of corporate-sector balance sheets.

Due to a growing realization that the yuan would not be a one-way trade grinding higher against the US dollar, Chinese corporations sought to pay down foreign exchange liabilities.

Kewei Yang, head of Asia-Pacific rates strategy at Morgan Stanley, explains:

The private sector is being more active in the optimization of asset-liability management. During periods of macro weakness and rising expectations of RMB weakness, the private sector becomes more active in reducing USD liabilities and increasing USD assets.

 

Financialtribune.com