China’s Outflows of Money Slowed in February

By KEITH BRADSHERMARCH 7, 2016

The New York Times

HONG KONG — Few economic statistics have gone as quickly from obscurity to the center of attention from international financial markets lately as China’s foreign currency reserves, widely seen as the best barometer of how long China can avoid a possible devaluation someday of its own currency.

Monthly changes in the reserves these days mainly reflect how much money is being sent out of the country by Chinese companies and families nervous about the country’s economic slowdown and sweeping anticorruption investigations. Over the last five weeks, the Chinese government has waged an aggressive campaign to stem the outflow, through almost daily pledges by officials not to devalue and through much tighter enforcement of the rules on sending money overseas.



Late Monday afternoon came word that the policies are starting to bear fruit: the erosion in China’s foreign exchange reserves slowed sharply last month from the pace of $100 billion a month that prevailed through the winter. Reserves fell by $28.6 billion last month, to $3.202 trillion.

Most economists had anticipated a somewhat larger drop in reserves — Barclays had expected a fall of $70 billion, for example.

The decline announced on Monday “is an encouraging sign because the concern amongst a lot of the bears was that the outflows would keep accelerating — the fact they’ve eased is reassuring,” said Julian Evans-Pritchard, the China economist for Capital Economics, a research firm based in London.

Yi Gang, the senior deputy governor of the Chinese central bank, dismissed concerns about the nation’s currency during remarks earlier in the day outside the National People’s Congress session in Beijing. “The cross-border capital flows are in the normal range,” he said.

At a time of turmoil in world financial markets, the renminbi is actually among the most stable currencies, Mr. Yi added. “Our volatility, the fluctuations of the renminbi against the U.S. dollar and also the fluctuations against a basket of currencies, in reality and from a global perspective, are fundamentally the smallest.”

China had caused alarm overseas and at home by devaluing its currency by 4 percent over three days in August, and by almost as much again over five weeks in late December and early January. The drop has prompted individuals and companies to move money overseas or make other moves. Many companies, for example, have repaid loans denominated in dollars before they become even more expensive in renminbi terms.

But since January, the central bank, the People’s Bank of China, has set the daily fixing of the renminbi against the dollar in Shanghai with no clear trend toward the strengthening or the weakening of the currency. And state-controlled Chinese banks have also intervened heavily in the less regulated Hong Kong market to protect the currency’s value here.

Defending China’s currency, the renminbi, could nonetheless remain a challenge for Beijing. Prime Minister Li Keqiang announced on Saturday that his government would step up China’s already brisk expansion of its money supply, further flooding the economy with renminbi in an effort to make sure that banks can keep pumping out loans to companies.

Mr. Li included the money supply target in a broader panoply of measures aimed at maintaining economic growth at 6.5 percent or higher through 2020. Monetary stimulus helps economic growth by holding down interest rates. But lower interest rates also make it less attractive to invest in a currency, which could fuel further outflows of money from China.

The reserves are a far from perfect measure of money leaving China. For starters, the change in the total value of the reserves is not influenced just by how much the central bank spends in currency markets to offset the outflow of money by Chinese companies and families.

Changes in the value of China’s vast hoard of government securities and some equities denominated in euros, yen, pounds and other currencies also affect the overall level of the reserves, which is quoted in dollars. Economists estimate that about two-fifths of the reserves are held in currencies other than the dollar, and the dollar weakened slightly against most currencies during February.

That suggests that the overall value of the reserves increased by about $13 billion last month because of currency moves — and indicates that the outflow of money in the last month may have been $13 billion greater than the figure of $28.6 billion that was announced on Monday morning.

Another consideration is China’s huge trade surplus, which brings another $50 billion or so into the country each month, although the surplus narrowed to $32.6 billion last month, partly because of the Chinese New Year. The decline in reserves last month suggests that capital outflows may have totaled about $75 billion, using all of the nearly $33 billion from the trade surplus and the $13 billion or so from valuation changes, in addition to nearly $30 billion from the reserves.

The change in central bank reserves does not include one other variable that will not be released until later this month and will provide a further clue on outflows: how much state-controlled banks spent on intervention last month.

In the last two weeks, Chinese officials have said repeatedly that they do not see a need to devalue the country’s currency against the three baskets, or weighted averages, of various foreign currencies against which the central bank measures it. The Chinese central bank strengthened the renminbi against the dollar by nearly 0.3 percent on Monday morning in fixing the daily band of values within which the renminbi is allowed to trade in Shanghai.

Based on one model of reserves adequacy proposed by the International Monetary Fund, China needs a minimum of $1.5 trillion if it bars practically all investment flows in and out of the country. A minimum of $2.7 trillion is needed if China allows money to move in and out of the country freely. The central bank has been gradually tightening the enforcement of its regulations on capital flows.

The level of China’s reserves has become a subject of intense international interest as some large American hedge funds, like Hayman Capital Management in Dallas, have placed big bets in financial markets on a Chinese devaluation in the coming 12 to 18 months. “I’m not someone who hates China,” said J. Kyle Bass, the founder and principal of Hayman Capital, in a telephone interview last week. “What I’m good at is spotting credit bubbles.”

But Chinese officials and many Chinese economists disagree with that gloomy prediction. They contend that official statistics showing limited bank exposure to nonperforming loans are credible, and that bank reserves to handle these loans are ample.

Chris Buckley contributed reporting from Beijing.