China capital outflow picks up - AmpGFX

Greg Gibbs, Director at Amplifying Global FX Capital, suggests that China’s citizens and companies are mainly seeing the increased volatility and, more recently, a rapid fall in CNY against the USD and this appears to be resulting in a more persistent capital outflow from China.

Key Quotes

“Outflows rose to peaks in Sep and Dec 2015, as fear of CNY depreciation picked up after the one-off CNY devaluation in August 2015. FX outflow has persisted this year, although it has been more moderate since April, perhaps contained at times by a weaker USD and Chinese government enforcement of capital controls, limiting outflow.

Adding in these cross-border flows of RMB makes the capital outflow look more significant, picking up recently to a high since January of around US$73bn in September ($US44bn in RMB cross-border flows).  The movement of capital in RMB may be a way for Chinese citizens and companies to avoid restrictions that apply to converting RMB to FX onshore.

The evidence suggests that once this RMB has been moved offshore (to Hong Kong), it is converted to FX.  Even though there has been a sharp increase in RMB movement from onshore to offshore, RMB held on deposit in Hong Kong has declined, suggesting it is mostly converted to FX.

The Chinese government has turned to intervening, not only in the domestic CNY market, but also at times in the offshore CNH market.  They have tightened liquidity in Hong Kong pushing up CNH rates in Hong Kong to help reduced selling pressure on CNH. 

Another avenue some people have discussed as a way Chinese citizens have used to move capital offshore or at least exit exposure to CNY has been to buy Bitcoin.  Bitcoin is much more ‘flighty’ and its correlation with CNY is not obvious, but the value of bitcoin has increased by more than double since the CNY was devalued last year.

The outflow is also apparent at the corporate level with Chinese companies pursuing more offshore acquisitions in what appears to be in part driven by a desire to diversify balance sheet exposure away from the Chinese currency and assets.  Bloomberg data estimates Chinese offshore acquisition at an annual record of $217bn this year.”