BIS Report | China’s USD175 billion outflow wasn’t investor flight

The headquarters of the Bank for International Settlements (BIS) are reflected in a window in Basel

Persistent capital outflows from China since mid-2014 were probably driven more by local companies paying down their dollar-denominated debt – in anticipation of a stronger U.S. currency – than investors ditching assets, according to the Bank for International Settlements.
The outpouring of China’s currency “led to two different narratives,” researchers for the Switzerland-based institution said in a report this week. “One tells a story of investors selling mainland assets en masse; the other of Chinese firms paying down their dollar debt. Our analysis favors the second view, but also points to what both narratives miss – the shrinkage of offshore renminbi deposits.”
The BIS, which warned in December that emerging-market nations may be borrowing too much too quickly, examined a record USD175 billion net decline in cross-border capital to China in the July-September period of 2015. Of that, the study showed $12 billion of this was official reserves outflows, and the remainder was private outflows.
Almost three quarters of the $163 billion of non-reserve outflows was comprised of factors including a reduction in yuan deposits, which was counted as $80 billion in capital leaving the country, as well as local Chinese companies directly repaying $34 billion in foreign-currency debt to offshore banks and $7 billion to local banks.
The assertions by the 85-year-­old institution, which coordinates the biggest central banks, sheds some light on China’s economic fragility, which has riveted investors ever since the $5 trillion stock market crash last summer.
China’s foreign-exchange stock-­pile fell by $28.6 billion to $3.2 trillion in February, declining for 16 of the past 18 months, the People’s Bank of China said in a statement yesterday. The drop was the smallest since reserves increased in October.
Premier Li Keqiang announced a 6.5 percent to 7 percent expansion goal Saturday, down from an objective of about 7 percent last year and the first range offered since 1995. To reach the new target, the government will permit a record deficit and has raised its money-supply expansion target.
As the slowdown in Asia’s largest economy became more evident, it has roiled markets worldwide. China’s credit-rating outlook this month was lowered to negative from stable at Moody’s Investors Service, which highlighted the country’s surging debt burden and questioned the government’s ability to enact reforms.
The country’s total debt-to-­GDP ratio swelled to 247 percent last year from 166 percent in 2007, propelled by a lending binge in the aftermath of the global financial crisis.
Partial data suggested outflows from China continued in the fourth quarter of 2015. While the reduction of offshore yuan deposits slowed during the period, repayments of foreign-currency debt by companies accelerated, the BIS said. Price developments so far this year also suggested greater strains than in the second half of last year, it said.
The Chinese central bank’s “declared intention to keep the renminbi stable in effective terms would imply a weaker renminbi against the dollar were the dollar to appreciate against major currencies,” the Basel-based institution said. “In this event, offshore depositors might not hold onto maturing renminbi deposits and Chinese firms would still have reason to repay dollar-denominated debt.” Anchalee Worrachate, Bloomberg