China: First capital inflows in 34 months – Standard Chartered

Kelvin Lau, Senior Economist at Standard Chartered, notes that the China recorded non-FDI capital inflows of USD 15.6bn in February, according to their China capital flows tracker, an unexpected turnaround after outflows of more than USD 60bn for five consecutive months.

Key Quotes

“This is the first month of inflows since April 2014, before the Chinese yuan (CNY) daily fixing reform was implemented and hurt sentiment in August 2015. The finding is also consistent with the rise in FX reserves by c.USD 14bn, after our adjusting for the FX valuation change, over the same period, despite the sizeable drag from the current account.”

“The People’s Bank of China (PBoC) reported a USD 8.5bn decline in FX assets in February, less than the USD 30.2bn drop in January. The February decline is modest considering the reported dip in the merchandise trade balance to a deficit of USD 9.1bn (from a surplus of USD 51.3bn prior). The services trade deficit also likely stayed wide at around USD 17.4bn, by our estimate. We therefore calculate capital inflows of USD 18.1bn, of which USD 2.5bn was net FDI inflows. Outward direct investment (ODI) fell 26% m/m after an already weak January due to more scrutiny by the authorities; FDI inflows also eased, but outpaced ODI in absolute terms for a third straight month.”

“We believe it is too early to claim that capital outflow pressure is over. A more stable USD has been key in easing the need for CNY intervention YTD, but the authorities have also taken substantial measures to swim against the tide by (1) increasing control and scrutiny of capital outflows, (2) stepping up measures to attract capital inflows, and (3) implementing higher onshore interest rates. Such policy efforts are unlikely to reverse soon given their proven effectiveness, but also given the persistent risk of increased US-China trade friction and renewed USD strength.”