China's Capital Outflow to Slow, Standard Chartered Says

  • Ding forecast yuan will trade at 6.5 per dollar by year-end
  • PBOC will intervene more to prevent `an overshoot' in currency

Chinese companies have repaid enough of their foreign-currency loans that their demand for dollars will drop in coming months, helping slow the pace of capital outflows and bolster the yuan, according to Standard Chartered Plc’s chief China economist.

“The main driving force for the capital outflow is that more onshore companies unwound the short-dollar positions,” Ding Shuang of Standard Chartered, which makes most of its earnings in Asia, said in an interview. “The currency mismatch risk has improved in the corporate sector,” the former economist for the People’s Bank of China said.

Chinese firms have been paring their dollar borrowing in recent quarters as the economic slowdown shifted investor forecasts for the yuan from appreciation to depreciation. Foreign-currency loans declined by $219 billion in the nine months through March while deposits increased, shrinking China’s net liability to $26 billion from $312 billion, according to data from the State Administration of Foreign Exchange.

The trend has continued in recent months as China’s shock devaluation in August accelerated the outflow, prompting the PBOC to drawn down its foreign reserves by a record $94 billion last month.

Now that the Chinese firms have a more balanced loan book, their need for dollars will decline, said Ding. The slowdown in capital outflows will help stabilize the yuan and support the government’s case that there’s no need for a large currency depreciation.

Yuan Forecast

This view is in line with Goldman Sachs Group Inc., which said in an Aug. 28 report that outflows will slow to $50 billion in the fourth quarter, from $100 billion between July and September and from a peak of $206 billion in the first three months.

The yuan weakened 0.1 percent to 6.3839 per dollar Wednesday after a private gauge of the Chinese manufacturing industry fell to the lowest since March 2009. The currency has stabilized in recent weeks, losing less than 1 percent since Aug. 11 when the central bank lowered its official fixing by a record 1.8 percent in a move toward a more flexible exchange-rate regime.

Ding predicts that the yuan will trade at 6.5 per dollar by year-end and rise to 6.35 by the end of 2016. The median forecast of strategists surveyed by Bloomberg was for the yuan to weaken to 6.58 per dollar by the end of next year.

‘Moderate Rebound’

The Johns Hopkins University-educated economist joined Standard Chartered in April after working at Citigroup Inc. for four years. Previously, he was an economist at the International Monetary Fund and at China’s central bank.

He said the PBOC will continue intervening in the currency market to prevent “an overshoot” in the exchange rate and a buildup of yuan depreciation expectations. At the same time, regulators will tighten loopholes in its capital controls to stem disorderly outflows.

China will have a “moderate rebound” in growth during the fourth quarter as the central bank loosens its monetary policy and the previous stimuli start to filter down to the economy, Ding said.

Chinese President Xi Jinping said in a speech in Seattle on Wednesday that the country will continue to show strong economic growth.

“The long-term positive trend of the Chinese economy will not change. We are clearly aware of the risks and challenges in the Chinese economy... In the long run, the fundamentals of the Chinese economy are good and sound,” Xi said.

(A previous version of this story was corrected to show Ding forecasts the yuan will rise to 6.35 per dollar in the eighth paragraph.)

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