China’s capital flow turned positive in the first half of 2017, a reversal from unprecedented outflows during the previous two years that sparked worries over financial stability.
China ran a $16bn surplus over the first half of this year, excluding central bank intervention, compared with a $417bn deficit in 2016, balance of payments data showed. The figures also showed that China added to its foreign exchange reserves on a valuation-adjusted basis in the second quarter for the first time since early 2014.
“Everyone now understands that the central bank has both the intention and the power to keep the currency stable, so the expectation of depreciation has weakened substantially,” said Xiao Lisheng, deputy director at the Chinese Academy of Social Science’s Institute of World Economics and Politics. “In addition, China’s economy has rebounded strongly.”
The renminbi has strengthened 3.4 per cent this year, a reversal from its record 6.5 per cent fall in 2016, in part reflecting central bank efforts to squeeze bearish speculators and boost confidence.
Meanwhile, forex reserves rose for a sixth straight month in July, according to separate data out on Monday. This marks the longest run of increases since 2014, when reserves touched a record high of $3.99tn. Forex reserves were up $24bn from a month earlier and $80bn from January’s five-year low.
But valuation effects from dollar weakness flattered the headline figure last month, adding $34bn, according to FT estimates. That implies a decline of $10bn in July on a flow basis. A weaker dollar increases the dollar-denominated value of forex assets held in euro and other non-dollar currencies.
Even as the government has staunched the immediate flood of outflows, there are signs that investor sentiment remains bearish over the medium term.
“Hot money” — short-term money movements viewed as a gauge of investor sentiment toward Chinese assets — continues to flow out of the country, albeit more slowly, according to FT estimates based on official data.
Hot money outflow was $126bn in the first half on a net basis, well behind the $891bn full-year pace for 2016. The FT uses a broad definition of the term, treating all money flows not related to goods trade or foreign direct investment as hot money.
That suggests investors are eager to take money out of China if they can skirt capital controls, despite recent tightening. Indeed, a Reuters poll of 60 forex analysts in late July showed that they expect the renminbi to erase most of this year’s gains over the next 12 months.
A Federal Reserve paper in June argued that a substantial share of China’s reported deficit from trade in services is actually disguised capital flight.
“A lot of Chinese view domestic assets as overvalued, whether it’s real estate or bonds. So there’s still fundamental demand from them for overseas assets that will continue, which doesn’t depend on expectations about the exchange rate,” said Mr Xiao.
In a sign that the government remains vigilant despite the improvements, regulators have imposed new measures in recent weeks to prevent capital flight.
Last week, the foreign exchange regulator named and shamed nine banks for violating forex rules. The agency is also requiring lenders to issue daily reports on all foreign bank card purchases by customers worth more than Rmb1,000 ($149) beginning later this month.
In May, the central bank announced a change to the way it sets its daily exchange rate guidance, a move to boost Beijing’s flexibility to prevent depreciation.