In April, China recorded an increase in the tendency of capital outflows.
The intensification of the dynamic of the mentioned process has become a factor in rising pressure on the yuan. This state of affairs is also exacerbated by a more global circumstance, which is the weak domestic economic situation in China. Moreover, a factor that to some extent worsened the present configuration of economic reality in the Asian country is the continuing uncertainty about the next actions of the Federal Reserve System in the context of the issue of changing monetary policy. In this case, the main focus is on what interest rates in the United States will be shortly. After the relatively optimistic US inflation data in April, the probability that the Fed will still decide to lower the cost of borrowing this year has increased.
Official data from the Chinese authorities, which were released at the end of last week, indicates that in April local companies purchased such a volume of foreign currency from banks, which is the largest since 2016. It is worth noting that at the same time, exporters refused to convert to dollars. This may be a temporary solution. In April, Chinese residents actively snapped up foreign currencies for overseas travel.
The mentioned official data also suggests that the Asian country is currently experiencing what can be described as a cautious approach to the yuan. The relatively low-interest rate in China compared to the level of this indicator in the United States is a factor favoring the dollar.
The People’s Bank of China has taken measures in the form of stepping in to keep the yuan exchange rate in a tight range. At the same time, the activities of the financial regulator of the Asian country are complicated by such circumstances as the continuing uncertainty about what decisions the Fed will make shortly regarding the timing and extent of lowering the cost of borrowing.
A note from economists and strategists at Goldman Sachs Group Inc. contains a statement on the expectation that Chinese policymakers will maintain tight control to avoid a depreciation scenario. In this context, experts separately noted that strong fixing of the yuan exchange rate and offshore liquidity management can become instruments of action. In their opinion, the likelihood of using such mechanisms increases against the background of the strengthening of the tendency of capital outflow from the Asian country.
Data from the State Administration of Foreign Exchange of China shows that in April, local banks sold $36.7 billion worth of foreign exchange to their customers. This figure is the highest since December 2016.
In April, investors in China mainly favored assets in foreign currency under the capital account. This trend is evidence of a high level of optimism about securities that have not been denominated in yuan. The current account was also not supportive of the yuan as it showed net purchases of foreign currencies. This dynamic is what can be described as a rare phenomenon since in recent years Beijing has systematically received a surplus from export activities. Moreover, in China, the tendency of an increase in the shortage of services related to outbound travel is recorded.
Dan Wang, chief economist at Hang Seng Bank China Ltd., says that exporters have a greater tendency to hold foreign currency, abandoning the yuan. The expert also noted that the corresponding behavior is due to weak expectations regarding the prospects that the economic system of the Asian country in the foreseeable future will demonstrate the dynamic of significant growth. Moreover, the factor impacting the actions of exporters is the outflow of capital, which demonstrates an increase.
Last month, Chinese banks wired $29.5 billion worth of funds overseas. These funds were wired on behalf of clients of financial institutions for direct investments. The mentioned indicator is a record. It is worth noting that the specified figure includes foreign investments in China and financial injections carried out by an Asian country overseas.
Shrinking inflows of foreign direct investment into China can be interpreted as a reflection of higher interest rates in the United States. In this case, the tendency is not a signal that abroad companies are beginning to lose interest in interacting with an Asian country. The corresponding point of view is held by analyst Gerard DiPippo. In a note released last week, this expert said that non-resident companies, including Chinese firms with offices in Hong Kong, may have moved their cash offshore to get higher yields.
