China Could Face “Sharp” Rise In Capital Outflows If Stocks, Economy Lose Momentum
We’ve written quite a bit over the past two months about capital outflows from China. Last week for instance, we documented how the country saw its fourth consecutive quarter of outflows in Q1, bringing the 12 month running total to some $300 billion. Why, beyond the obvious, is this a problem for China? Because pressure is mounting to devalue the yuan as the currency’s peg to the recently strong dollar is becoming costly for the country’s export-driven economy.
Here’s Soc Gen’s Albert Edwards on the subject:
In the current deflationary environment the Chinese authorities simply can no longer tolerate the continued appreciation of their real exchange rate caused by the dollar link.
And from Barclays:
Amid slowing inflation and rising outflows, the costs of limiting CNY weakness are growing – including the unintended effect of placing more stress on CNY market liquidity and interest rates, rendering liquidity easing efforts less effective.
And here is how we summed up the situation last month:
China is suddenly finding itself in an unprecedented position: it is losing the global currency war, and in a “zero-sum trade” world, in which global commerce and trade is slowly (at first) declining, and in which everyone is desperate to preserve or grow their piece of the pie through currency devaluation, China has almost no options.
At issue is the fact that expectations about the direction of the yuan may be contributing to capital outflows and any indication on the part of Beijing that devaluation is in the cards could exacerbate the problem. Now, data from SAFE suggests nearly $24 billion left China in March alone. Here’s more, via Bloomberg:
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