China could see capital outflows of $500 billion this year, posing a challenge to policy makers trying to defend the yuan in the midst of an economic slowdown and a plunge in equities, according to JPMorgan & Chase Co.’s chief Asia strategist.
While the People’s Bank of China would like to control the yuan’s decline, those holding assets denominated in the currency could sell to avoid losses, Adrian Mowat said in an interview in Manila on Tuesday. The nation is estimated to have seen withdrawals of $650 billion last year, he said.
“You are going to have this tension around the renminbi and it will continue to drive volatility,” said Mowat, referring to the yuan by its official name. “Another area where you have tension is that the markets aren’t allowed to find their levels in the A-share market.”
China’s stockpile of foreign-currency reserves plunged $513 billion last year to $3.33 trillion, the first annual drop since 1992, as the nation propped up the yuan. The Shanghai Composite is the worst performer in January among 93 primary equity gauges tracked by Bloomberg, while the economy grew last year at the slowest pace in a quarter century.
Mowat’s forecast for last year’s capital outflows from China compares with a figure of $1 trillion estimated by Bloomberg Intelligence. While outflows surged in December 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 alone, exporters are holding funds in dollars instead of the yuan, according to Tom Orlik, Bloomberg’s chief Asia economist in Beijing.
The MSCI China Index, a gauge of mainland companies listed in Hong Kong and other overseas markets, would still be able to erase losses recorded so far this month and end 2016 with a gain, Mowat said. The gauge, whose members include U.S.-listed Internet services companies Alibaba Group Holding Ltd. and Baidu Inc., is expected to report earnings growth of 15 percent this year, he said.