In a concerning trend, capital is leaving China at an unprecedented pace, intensifying the pressure on the yuan. The recent weeks have witnessed a rapid increase in capital flight, attributed to growing apprehensions about China’s beleaguered real estate sector. The State Administration of Foreign Exchange, China’s currency regulator, reported that onshore banks sold a net $19.4 billion of foreign currencies to clients in October, the highest figure since November 2018, during the U.S.-China trade war. Additionally, banks sent a net $53.9 billion overseas on behalf of their customers, marking the largest monthly outflow since January 2016, when policymakers orchestrated a currency depreciation. Goldman Sachs Group Inc. also noted a substantial surge in net outflows, with approximately $75 billion leaving in September, a nearly 80% increase from August. These capital outflows are having a detrimental effect on the yuan, which has weakened this month in both offshore and onshore trading. The currency now stands less than 1% away from the year’s lowest point reached in early September.
The underlying causes of this capital flight include the interest rate differential between China and foreign markets, where China’s central bank has maintained low rates to stimulate economic growth. This has led to a considerable disparity in yield between U.S. and Chinese assets, reaching levels unseen in over two decades. Goldman analysts have suggested that this unfavorable interest rate spread may result in continued depreciation and capital outflows in the coming months.
Official data indicates that China experienced outflows from both the current account and the capital account in September. Contributing factors included a service deficit linked to outbound travel, a decline in direct investment, and increasing outflows related to securities. In a related development, overseas funds reduced their holdings of Chinese sovereign bonds by ¥13.5 billion ($1.85 billion) in September, reaching the lowest level since March 2021 at ¥2.07 trillion.
China’s stock market decline is further exacerbating the situation, with global funds selling $1.6 billion in onshore equities via trading links with Hong Kong, marking the most substantial sale in over two months. With the benchmark CSI 300 index hitting a new yearly low and the Shanghai Composite Index falling below 3,000, experts suggest that without further policy intervention, the exodus from onshore equities may reach an “unprecedented stage.” The cumulative outflows between August 7 and October 19 amounted to $22.1 billion, marking the most substantial outflow in the history of Stock Connect, which facilitates trading between Hong Kong and mainland China.
In this volatile climate, the financial community is closely monitoring the consequences of this capital exodus on the Chinese economy and global financial markets.
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