‘China’s outflows not investor flight’

PERSISTENT capital outflows from China since mid-2014 were probably driven more by local companies paying down their dollar-denominated debt – in anticipation a stronger US currency – than investors ditching Chinese assets, according to the Bank for International Settlements (BIS).

The outpouring of China’s currency “led to two different narratives”, researchers for the Switzerland-based institution said yesterday.

“One tells a story of investors selling mainland assets en masse; the other of Chinese firms paying down their dollar debt. Our analysis favours the second view, but also points to what both narratives miss – the shrinkage of offshore (yuan) renminbi deposits.”

The BIS, which warned in December that emerging market nations might be borrowing too much too quickly, examined a record $175 billion (R2.7 trillion) net decline in cross-border capital to China in the July to September period of 2015.

Of that, the study showed just $12bn of this was official reserves outflows, and the remainder was private outflows.

Private outflows

Almost three quarters of the $163bn of non-reserve outflows was comprised of factors including a reduction in yuan deposits, which was counted as $80bn in capital leaving the country, as well as local Chinese companies directly repaying $34bn in foreign-currency debt to offshore banks and $7bn to local banks.

The assertions by the 85year-old institution, which coordinates the biggest central banks, sheds some light on China’s economic fragility, which has rivetted investors ever since the $5trln stock market crash last summer.

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-gross domestic product ratio surged 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. – Bloomberg