- Capital exiting underscores bearish sentiment on yuan
- Outflows increased to estimated $158.7 billion in December
China’s capital outflows jumped in December, with the estimated 2015 total reaching $1 trillion, underscoring the scale of the battle facing policy makers trying to hold up the yuan amid slower economic growth and slumping stocks.
Outflows increased to $158.7 billion in December, the second-highest monthly outflow of the year after September’s $194.3 billion, according to estimates compiled by Bloomberg Intelligence. The total for the year soared more than seven times from $134.3 billion in the whole of 2014 to a record for Bloomberg Intelligence data dating back to 2006.
December’s outflows increased by almost $50 billion from a month earlier after the central bank unnerved markets by saying it would refocus the yuan’s moves against a wider basket of currencies rather than the dollar. In addition to capital exiting the economy, exporters are holding funds in dollars instead of converting them to yuan, said Tom Orlik, Bloomberg’s chief Asia economist in Beijing.
"The immediate trigger for a pickup in capital outflows toward the end of the year was the People’s Bank of China’s poor communication over its shift in currency policy," said Mark Williams, chief Asia economist for Capital Economics Ltd. in London, who previously worked on China issues at the U.K. Treasury. "Outflows are likely to remain strong because the People’s Bank still has not been able to generate confidence among investors that it knows what it’s doing or that it’s able to achieve its policy objectives."
China’s cross-border capital flow risks are controllable and the nations’ foreign exchange reserves are ample to help it defend against external shocks, the State Administration of Foreign Exchange said on its website Jan. 21.
China’s foreign exchange reserves are seen tumbling $300 billion this year to the $3 trillion level some analysts say risks undermining confidence in the central bank’s ability to defend the currency, according to a Bloomberg News survey.
Policy makers have been burning through reserves to reduce yuan volatility as the currency lost its status as a one-way bet on appreciation amid the slowest economic growth in a quarter century and an unexpected devaluation in August. The stockpile of reserves plunged $513 billion last year to $3.33 trillion, the first annual drop since 1992.
Outflows spiked in September and December after currency policy changes caught markets by surprise, said Williams. China’s yuan policy has "a communication issue" and needs "better and more communication," International Monetary Fund Managing Director Christine Lagarde said last week.
— With assistance by Kevin Hamlin