Measuring Chinese capital flight

From UBS:

ChinaCapitalOutflowsMayFX reserves shrank sharply by USD 113 billion in Q1, following last Q4’s contraction of USD 45 billion and 2014’s annual increase of USD 22 billion. PBC’s FX asset also shrunk by RMB 252 billion in Q1 (vs. last Q4’s fall of RMB 134 billion). Our preliminary estimates show that China saw non-FDI capital outflows of around USD 190 billion in Q1 on a BoP basis. Recent data release showed that China’s capital & financial account (excluding reserve assets) recorded a deficit of USD 159 billion in Q1…

In Q1 2015, China saw an even sharper pace of FX reserve contraction, with a negative valuation effect (of around USD 34 billion) and non-FDI capital outflows (of around USD 190 billion) more than offsetting a still sizable trade surplus of goods & service (USD 77 billion) and largely stable net FDI. The main types of non-FDI capital flows include the usual portfolio investment flows, trade credit flows, other foreign borrowing and foreign lending, domestic banks interbank borrowing and offshore lending, interest rate arbitrage flows, and capital flight.

Factors driving recent persistent capital outflows likely include: corporates’ increasingly holding on to their FX proceeds due to weaker RMB appreciation expectation; growing market concerns over China’s property downturn and recent weak economic data; weakening or unwinding of interest rate arbitrage capital flows due to the anticipated rise in global interest rates and fall in domestic interest rates; an increased desire by domestic residents to diversify their assets globally; among others.

This is why Chinese authorities are struggling get traction with their easing program (as well as realty oversupply). Capital outflow sterilises the PBOC’s domestic liquidity measures in a complete reversal of the dynamics that built the boom. Heaven help ’em when the capital account is loosed!

About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.