China's capital outflows tripling in November

December 10
10:10 AM 2015

The capital outflows from the world's second-largest economy registered record level in November. The capital outflow grew almost three times in November from October.

Causing much concern to the Chinese government, the foreign exchange (forex) reserves fell significantly during the month. The Chinese government is intervening in the forex market by selling US dollars to arrest fall of the renminbi.

Julian Evans- Pritchard, China economist at the Capital Economics' Singapore office, has estimated capital outflows from the country. His calculations reveal that fluctuations in exchange rates accounted for $30 billion of that reduction. This has left $57 billion in foreign exchange sales by the Central Bank.

According to data from Capital Economics, the net capital outflows from China rose to $113 billion in November from $37 billion in October. The foreign exchange reserves were dropped by $87.2 billion to $3.44 trillion in November.

Evans-Pritchard said, "a rise in offshore interest rates due to the increased likelihood of a December Fed rate hike will also have added to outflow pressures."

The main reason for the surge in capital outflows from China was concerns about further depreciation of Yuan. The forex fluctuations have reduced the US dollar value in reserves held in other currencies by $30 billion. 

As per a report published on the Financial Times, the continuous outflow from the dragon country is driving the People's Bank of China (PBOC) to offload US dollars in the market in support of renminbi.

The Financial Times made a forecast of $3.475 trillion forex reserves for China in November and Bloomberg's average forecast was at $3.493 trillion. But, China's $3.438 trillion forex reserves were below the forecasts. 

Concerned with the weakening Yuan, the Chinese government has started aggressively selling the US dollars. The positive view of a weaker renminbi is that it would give competitive pricing for exports.

In a report by Market Watch, Julian Evans-Pritchard said the pick-up in capital outflows appears to have been "predominantly driven by increased expectations for renminbi depreciation".

"China may have continued to unload US Treasury to finance its forex interventions. The US government data reveals that China's treasury holdings fell to $1.258 trillion in September from $1.271 trillion in August.", Evans-Pritchard said.

If foreign exchange sales were combined with $55 billion trade surplus estimate by Capital Economics in November, it gives net capital outflows at $113 billion. 

The net capital outflows at $86.3 billion in August, during which China's unexpected devaluation of currency Yuan rocked the global financial markets.

However, the US Treasury estimated that capital outflows were $200 billion during that month. Different calculations give variation in net capital outflows. But, all these estimates are confirming the net outflow is increasing. 

The latest manufacturing Purchasing Managers Index (PMI), a measure of factory activity, has disappointed the global markets. The PMI data for November about China's manufacturing sector weakened the investor confidence. 

The executive board of IMF in November voted for the inclusion of Yuan in the new SDR basket, which will be launched on 1 October 2016. The inclusion of Chinese currency will pave the way for the dragon country to become a global economic power. 

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