Capital flows likely to stay stable in 2018

Strong economic fundamentals to help nation weather US interest rate shocks

Cross-border capital flows are expected to remain stable this year given the relative positive external environment and strong economic fundamentals, a senior official with the nation’s top foreign exchange regulator said on Thursday.

The country’s cross-border capital flows are unlikely to be affected by the expected future interest rate hikes in the United States, as data showed that the market did not overreact to the US Federal Reserve’s actions in 2017, said Wang Chunying, a spokesperson for the State Administration of Foreign Exchange.

Despite the boost from US tax cuts, the dollar index fell by 9.9 percent in 2017. And major emerging market currencies appreciated against the greenback.

According to Wang, China’s strong economic fundamentals will help it to weather the potential Fed shocks.

The country has already started to see more balanced cross-border flows, according to government data.

Last year, experts had predicted that the yuan would continue to depreciate after it ended 2016 with its biggest loss since 1994. But in reality, “2017 was a turning point for China’s cross-border flows,” Wang said, referring to improved forex reserves and fewer outflow pressures.

Forex reserves increased by $129.4 billion to reach $3.1 trillion in 2017, compared to the $319.8 billion value decline in 2016, according to SAFE. Latest data show banks only sold a net $69 billion value of forex in 2017, down by 78.4 percent year-on-year.

More rational market expectations for yuan’s twoway fluctuation have helped the cross-border flows become more stable, according to Wang.

“We found enterprises and individuals now purchasing and selling the currency as they need, and irrational behavior betting on continued depreciation of the yuan has been curbed,” she said.

Lower capital outflows at the end of 2017 and increased yuan deposits in the Hong Kong market also added more positive signs reflecting weakened speculative behavior, according to Wang Youxin, an analyst with the research institute of Bank of China.

He said cross-border capital flows are expected to sustain the good trend this year, supported by strong economic fundamentals, more rational outbound investment and fewer expected panic sell-offs of the currency.

Xie Yaxuan, chief economist with China Merchant Securities, said the central bank’s decision to reduce market interventions will be a supportive factor.