Sta­bil­i­sa­tionofChina’sCap­i­talOut­flowsMayHin­geonYellen

Has calmed a rush to get money out of China; Outlook de­pends on what the Fed­eral Re­serve sig­nals for US rate hikes

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New York: Whether China’s re­cent sta­bil­i­sa­tion of its cur­rency and cap­i­tal out­flows con­tin­ues — or down­side pres­sure reignites — may hinge in large part on Janet Yellen.

If the Fed­eral Re­serve chair sticks to a dovish script this week, there would be no ob­vi­ous trig­ger for a green­back rally and re­sult­ing cue for Chi­nese com­pa­nies and savers to squir­rel money out of the na­tion. Any sig­nal of an im­mi­nent in­ter­e­strate in­crease, and it’s a dif­fer­ent story — a US dol­lar rally could suck money out of China, pos­ing an added com­pli­ca­tion for the Peo­ple’s Bank of China’s ef­forts to un­der­pin eco­nomic growth. “The Fed and China are stuck in an un­com­fort­able dance,” said Frederic Neu­mann, co-head of Asian eco­nomic re­search at HSBC Hold­ings. “This yin-yang of the Fed and the PBOC could thus reignite volatil­ity down the road.”

Fed pol­icy mak­ers aren’t fore­cast to tighten dur­ing their two-day meet­ing end­ing Wed­nes­day in Wash­ing­ton. While of­fi­cials are pro­ject­ing two rate hikes this year, prices in fed­eral funds fu­tures con- tracts sig­nal that in­vestors see just one in­crease in 2016 as the more likely out­come.

Since the Fed last met in March, China’s own $10-tril­lion-plus econo- my has shown signs of sta­bi­liz­ing and its cur­rency and stock mar­kets have calmed, po­ten­tially clear­ing one of the rate-hike hur­dles that Yellen had flagged.

“The Fed is a cru­cial part of the dol­lar-yuan story,” said Wang Tao, chief China economist at UBS Group AG. “And the dol­lar-yuan story is a cru­cial part of the cap­i­tal out­flows story.”

Around $35 bil­lion in net cap­i­tal left China in March, bringing to­tal out­flows for the first quar­ter to around $175 bil­lion, ac­cord­ing to the In­sti­tute of In­ter na­tional Fi­nance. The Wash­ing­ton-based group fore­casts net cap­i­tal out­flows will ease to $538 bil­lion this year from $674 bil­lion in 2015.

Cap­i­tal out­flows hurt China by drain­ing cash from the econ­omy in a pe­riod when growth is un­der pres­sure and by forc­ing the PBOC to de­fend the yuan. The cen­tral bank burned through $513 bil­lion of its for­eign-cur­rency stock­pile last year.

“There re­main risks that out­flows could ac­cel­er­ate again if con­cerns about yuan de­pre­ci­a­tion in­ten­sify again,” IIF an­a­lysts led by Emre Tiftik wrote in a note on Mon­day.

To be sure, even if the Fed’s statement does take on a hawk­ish bent, it may not trig­ger an im­me­di­ate rush for the ex­its in China given the im­prov­ing econ­omy and re­peated pledges by au­thor­i­ties not to de­value the yuan. And while some of the depart­ing money has left through il­licit chan­nels, such as the use of fake trade in­voices, not all of it can be dubbed as cap­i­tal flight. In some ways, China has emerged more re­silient to fu­ture volatil­ity af­ter its brush with out­flows and in­vestor un­ease last year. One ex­am­ple: Cross-bor­der lend­ing to res­i­dents of main­land China fell by $114 bil­lion dur­ing the fourth quar­ter of 2015, or 25% from a year ear­lier.

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