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Money Matters

Renminbi weakness adds to China capital outflows

By James Kynge
Mon, 12, 16

Net capital outflows from China have risen to $530bn in the first 10 months of this year, with October's outrush exceeding this year's monthly average amid signs that the appetite for foreign exchange among wealthier Chinese is rising as the renminbi sinks against the US dollar.

More than 80 per cent of wealthy households in China surveyed by FT Confidential Research in November said they wished to hold more than 10 per cent of their savings in hard currency, the highest reading this year. The survey covered households earning more than Rmb300,000 ($43,500) annually.

This result hints at the pent up demand for dollars created by the renminbi's 5.8 per cent depreciation against the greenback this year - putting it on course for its biggest annual decline on record. With the US Federal Reserve widely expected to raise interest rates later this month, pressure on the renminbi may only intensify.

Louis Kuijs, head of Asia economics at Oxford Economics, an independent research institution, said he expects further renminbi depreciation from its current rate of Rmb6.88 to almost Rmb7 to the dollar by the end of this year before the currency hovers around that level throughout 2017.

However, Capital Economics, another research company, predicts a depreciation in the Chinese currency to about Rmb7.3 against the dollar by the end of next year.

"But we do not expect a repeat of the renminbi crisis that sent shockwaves through other emerging markets a year ago. Indeed, equities have shrugged off the plight of the renminbi," wrote David Rees, senior market economist, in a report. He added that renminbi weakness would mainly be a function of dollar strength rather than a reflection of domestic Chinese weaknesses.

Nevertheless, Chinese capital outflows continue at a brisk pace, with October marking the 33rd straight month in which more money has exited the country than flowed in, according to estimates compiled by the Institute of International Finance (see chart).

Total net outflows from China this year have abated from last year's high levels but have picked up over the past two months. The future trajectory of flows, however, is hard to forecast because Beijing is stepping up efforts to staunch key sources of outflows.

Curbs on international renminbi payments and gold imports this week are the latest in a string of capital control measures intended to relieve downward pressure on the currency and protect dwindling foreign exchange reserves.

The moves follow draft rules from China's cabinet that restrict large foreign acquisitions, while the foreign exchange regulator has begun to vet outward remittances as low as $5m, compared with a previous threshold of $50m.

The outflows from China contrast with a general pattern of net capital inflows into other emerging markets (see chart). But the sustainability of these too is becoming harder to foresee as a strong dollar and the potential for a rise in US interest rates later this month tends to sap emerging market momentum.

Most vulnerable if the tide of EM inflows starts to turn would be Ukraine, Hungary, Croatia, Sri Lanka and Turkey, according to a report by Société Générale, an investment bank.

This is because these countries, in varying degrees, have relatively high levels of debt in foreign currency, making it harder to service if its domestic currency weakens.

In addition, much of the debt is short term, curbing the country's ability to postpone payment. Lastly, each of these countries has a significant reliance on credit from abroad to keep its public sector humming.

If portfolio flows provide a sense of what might be to come, then November could mark an intensification in pressures. Portfolio flows measure stock and bond investors' attitudes to a country whereas broader capital flows signal the attitudes of longer-term investors, including companies building factories or engaging in M&A.

Data from the IIF show that international portfolio investors withdrew more than $24bn from EM assets in November, with cross-border outflows of an estimated $8.1bn from EM equities and $16.1bn from EM bonds.

The IIF said it had recorded only four months of bigger outflows since 2005 when the IIF's data series began: three at the height of the global financial crisis of 2008-09 and one following the announcement by the US Federal Reserve in May 2013 that it would soon begin tapering its $80bn-a-month programme of bond buying, or quantitative easing.