Analysis | Beijing finally stems outflows. Now what?

Is China finally making headway in its battle against currency outflows? On the surface, yes: People’s Bank of China foreign exchange reserves are effectively unchanged since December at USD3 trillion, and data for February released by the State Administration of Foreign Exchange showed a significant narrowing of net outflows of capital based on international bank settlements and sales.

That’s a major accomplishment, given that yuan had been leaving the country at an average rate of almost $60 billion per month in the middle of last year. But how this turnaround was achieved raises some serious long-term questions for China.

For one thing, it wasn’t driven by economic strength. Officially recorded payments and receipts are both down significantly across all categories. Total foreign bank inflows are flat, while payments abroad were down by 15 percent through the first two months of the year. With total outflow payments from banks of $3.1 trillion in 2016, a 15 percent drop represents a large decline in absolute terms.

[…] China hasn’t addressed what is pushing capital out of the country in the first place: a lack of appealing investments. Last year, private companies were responsible for only 33 percent of fixed-asset investment in China. In an economy beset by overcapacity and rising costs, it’s not surprising that they want to move capital abroad.

[…] More fundamentally, though, the government seems to be losing its influence over an increasingly affluent and business-savvy population. If people feel their interests are better served by moving money abroad, they’ll do so, and companies will find ways to help them. China may have stopped the outflows for now. Until it addresses the reasons money is leaving, that will be a Pyrrhic victory. Christopher Balding, Bloomberg