Capital controls contain China rout
HONG KONG: In many ways, it looks like the perfect environment for Chinese capital outflows: economic growth is slowing, US interest rates are rising, and the yuan is near its weakest level in a decade.
Yet signs of an exodus from the world’s biggest emerging market are hard to find. What gives?
Analysts point to China’s stepped-up capital controls. Tightened in the wake of a shock yuan devaluation three years ago, restrictions on everything from overseas takeovers to purchases of insurance policies in Hong Kong have kept outflows closer to a trickle than a flood in 2018.
That should provide some comfort to investors after a turbulent year for Chinese financial markets that included rising bond defaults, real estate jitters and a $2.7-trillion sell-off in equities.
Even as the yuan and Shanghai stocks sank to multi-year lows in October, Chinese demand for foreign currencies moderated, according to official data.
“Capital controls have played a very big role in limiting outflows during this round of yuan depreciation,” said Tommy Xie, an economist at Oversea-Chinese Banking Corp in Singapore. “It’s very unlikely we will see disorderly outflows again.”
Measures to curb capital flight include a ban on domestic cryptocurrency exchanges, increased disclosure requirements for those buying foreign currencies, and tightened restrictions on corporate investments abroad. All were designed to help avert a downward spiral of yuan depreciation, outflows and more depreciation.
That dynamic roiled the financial system in late 2015 and 2016, when investors pulled $1.4 trillion from the country. Net outflows this year through September have been a modest $296 billion, according to Bloomberg Intelligence.
“Compared with 2015 and 2016, outflow pressure has been moderate,” said Ding Shuang, Greater China and North Asia chief economist at Standard Chartered.
Of course, that could change if the yuan’s slide accelerates. Chinese citizens still haven’t lost interest in pulling money out: visits to Ybex, a Hong Kong-based online platform that helps connect individuals with foreign-exchange dealers, more than doubled from March to October.
“We’ve been receiving more and more inquiries about how to change money out of the yuan over the past few months,” said Andrew Lee, Ybex’s co-founder and CEO.
A key test will come in January, when China resets its $50,000-ayear foreign exchange quota for citizens.
If outflow pressures increase, authorities still have plenty of tools at their disposal. They could increase administrative hurdles for individuals and companies trying to pull money out, or step up market intervention to combat expectations of yuan weakness.