Courtesy of Also Sprach Analyst
The latest statistics from the People’s Bank of China suggest that while outflow continued into September, the size of the outflow has decreased compared with previous months.
The change of the position for forex purchases of the PBOC detailed monetary statistics has swung back into positive territory after decreasing for two straight months. Excluding trade surplus, the implied outflow has shrunk from RMB187 billion in August to RMB44 billion in September, a very sizeable improvement as far as capital flow is concerned. Note that the outflow figures implied here do not distinguish the destination of the outflow.
As noted for many times, sizeable outflow is not going to be supportive for the economy as it limits base money creation by the central bank, which has been happening for almost a year now. The improvement in money flow (at the very least, a reduction of outflow) will be supportive for central bank’s balance sheet expansion and foreign reserve accumulation, which will in turn be supportive for liquidity condition as long as the improvement continues.
Since the announcement of QE-Infinity, we have speculated that if QE-Infinity is enough to encourage inflow into China, it will be positive for the Chinese economy. Although the improvement in flows in September has not been enough to ease liquidity condition ahead of the seasonal cash crunch, the recent strength of the Chinese Yuan suggests that the improvement in capital flow may well have continue into October, which has (finally) helped lower interbank rates despite PBOC withdrawing liquidity through open market operation. In the short-run, as I have stressed a number of times, as long as inflows continue, it will be supportive for the economy.
Interestingly, the inflow improved despite a worsening in the foreign direct investment figures for September. The Ministry of Commerce latest numbers show that capital utilised fell 6.8% compared with a year ago, down from -1.43% yoy. For January-September, total FDI (capital utilised) fell to US$83.42 billion, down 3.8% lower than the same period a year ago.
Meanwhile, outbound direct investment for the month decreased by 26.1% yoy, down from –16.9% yoy. However, on a year-to-date basis, outbound investment for January-September increased by 28.9% compared with the same period a year ago.