China Currency Data Signals Second Month of Capital Outflows

Chinese central bank data signaled that capital flowed out of the nation for a second month in November, as bets for yuan appreciation diminished.

Yuan positions at financial institutions accumulated from foreign-exchange purchases stood at 25.46 trillion yuan ($4 trillion) as of the end of November, down 27.9 billion yuan in the month, People’s Bank of China data show. The figure declined a combined 52.8 billion yuan in the past two months, the first back-to-back drop since at least 2000.

Forward contracts on the yuan weakened on concern that outflows of investment and a narrowing trade surplus will ease pressure on the currency to appreciate, even as U.S. President Barack Obama calls for China to accelerate gains. Reduced inflows are also curbing the supply of cash in the economy, prompting the monetary authority to cut lenders’ reserve ratios this month for the first time in three years.

“Capital outflow in China has just started and it’s likely to continue into early next year,” said Ren Xianfang, a Beijing-based economist with IHS Global Insight Ltd. “The global economy will be in its most difficult time this quarter and next and the next few months will likely be the most volatile time for the global financial market.”

Twelve-month non-deliverable forwards fell 0.08 percent to 6.4095 per dollar, a 1 percent discount to the onshore spot rate. The yuan fell 0.1 percent to 6.3550 in Shanghai. It touched 6.3294 on Dec. 16, the strongest level since China unified official and market exchange rates at the end of 1993.

Trade Surplus

Other evidence that inflows into China are decelerating include the trade surplus narrowing 35 percent last month from a year earlier and foreign direct investment falling for the first time since 2009. China’s trade surplus this year may narrow by more than $30 billion from 2010, Minister of Commerce Chen Deming said in a statement released on the ministry’s website today.

The decline in yuan positions “triggered by slow economic growth and a reversal in yuan appreciation expectations, is in sharp contrast with historical patterns, which saw average growth of over 320 billion yuan per month for the first nine months of 2011,” said Li Wei, a Shanghai-based economist at Standard Chartered Plc.

The data “strengthened our outlook for continued reserve cuts, at least one more before the Chinese New Year holiday,” said IHS’ Ren, referring to the weeklong break that starts Jan. 23. Standard Chartered’s Li sees a cut this month.

China will face more disputes over trade and exchange rates in the next few years, the official Xinhua News Agency reported yesterday, citing Ding Yifan, a researcher at the State Council. The debt crisis in several countries may deepen in the first half of next year, likely creating frictions between China, the U.S. and Europe, Xinhua said, citing Ding. President Obama said at a news conference on Nov. 13 in Hawaii that “enough’s enough” on restraining yuan gains.