The specter of capital flight is back in China.
More money is leaving the world's No. 2 economy again, threatening Beijing's strategy of letting its currency weaken in a controlled fashion.
In the latest evidence of a surge in outflows, China's foreign reserves plunged $45.7 billion in October from the previous month to $3.12 trillion, official data showed Monday. That is the largest drop since January, suggesting that outflows could be edging back up to the record-breaking levels of late last year and early this year.
As much as $78 billion may haveleft China in September, according to Goldman Sachs, which has its own measure of outflows, the largest amount since the $100 billion-plus the firm estimates left the country in December and again in January. Analysts say October outflows are poised to be large as well.
China's regulators have acknowledged the pressure from money leaving the country but so far have dismissed concerns over capital flight.
One reason for the pickup, analysts and investors say, is that the yuan?or renminbi?is weakening faster again against the dollar, reigniting concern among Chinese individuals and businesses anxious to preserve the value of their domestic savings and assets.
The yuan has weakened 1.6% against the dollar since the end of September, even though Chinese authorities, who tightly control the currency's trading range, have repeatedly pledged to keep it stable. Central bank efforts have helped ward off faster depreciation?the currency appreciated against the dollar during the first quarter of the year and rose again slightly in July and September?but the yuan is still down 4.2% versus the greenback this year.
"Can anyone tell me what has happened to the renminbi's exchange rate? How much weaker can it become?" said Beijing schoolteacher Wang Fang, in a recent post on Chinese social-media app WeChat. In an interview, Ms. Wang said many of her friends have flocked to Hong Kong to buy foreign-currency-denominated insurance products? a popular way to stash money overseas?because of the heightened pace of yuan depreciation. "I certainly am thinking about that as well," she said.
Chinese looking for ways to guard against yuan depreciation have been investing in everything from gold to the virtual currency bitcoin, whose value on Chinese exchanges has surged 17% since the end of September.
Also contributing to higher outflows are Chinese exporters like Sunstone Development Co., which makes carbon blocks used in the production of aluminum and sells a third of its products overseas annually. Like many such manufacturers, Sunstone is "in no rush" to convert its dollar earnings into yuan, chairman Lang Guanghui says. That means less foreign currency is flowing into China to counterbalance the money going out.
In the past year, Sunstone has also bet on a weaker currency with derivative contracts that earn money if the yuan drops.
The increasing amounts of money leaving China pose a challenge for Chinese authorities who have been struggling to balance the need for a weaker yuan to help growth against the potential for destabilizing capital flight. The yuan started tumbling in August 2015, when China's central bank combined a move to make the currency more market-driven with a nearly 2% devaluation. The surprise move shocked global markets and sent money fleeing Chinese shores?despite capital controls that can curtail cross-border transactions by companies and limit the amount of foreign currency individuals can buy.
By the end of the year, while the yuan plummeted against the dollar, nearly $150 billion a month was leaving the country, according to some estimates, a pace that alarmed everyone from the International Monetary Fund to the People's Bank of China.
The PBOC reined in both the yuan's fall and outflows with measures ranging from intervention to prop up the currency's value and stricter oversight of outbound transactions to an exchange-rate-setting mechanism that gave the central bank more control over the yuan's price. The bank has used that mechanism to let the yuan drift lower as the values of either the U.S. dollar or other currencies have appreciated.
Now, however, the fall is accelerating as expectations that the U.S. Federal Reserve will raise rates by the end of the year push up the dollar.
Many analysts say a risky feedback loopis developing between yuan depreciation and capital outflows: As the yuan weakens, more Chinese residents and companies are seeking a safer store of value abroad, which in turn drags the yuan down further.
Bank of America Merrill Lynch estimates that outflows from China totaled $113 billion in the third quarter, up from $99 billion in the previous one. The bank now expects one dollar to buy 7.25 yuan at the end of 2017, compared with the 6.8 yuan it had forecast previously, in part because it expects significant capital outflows to continue next year.
The recent yuan depreciation has prompted an increase in inquiries on how to purchase foreign assets like dollar-denominated corporate bonds or London real estate, from mainland clients of a variety of income levels, said Wendy Tsang, head of private banking at Bank of China (Hong Kong)
Chinese authorities are once again stepping up efforts to police outflows. China UnionPay Co. in late October banned Chinese customers from purchasing most types of foreign insurance policies with credit or debit cards issued by the company?a popular means of getting large amounts of money out of the country.
In September, senior officials at China's foreign-exchange regulatory agency vowed to go after companies trying to circumvent capital controls and take funds offshore via what they call "fake" acquisition deals overseas.
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(END) Dow Jones Newswires
November 07, 2016 07:35 ET (12:35 GMT)
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