| 28 February 2024, Wednesday |

Surging dollar tests China’s capital controls as cash flees

As investors flee a collapsing currency and failing economy, cash is fleeing China’s financial markets at the quickest rate in years, and analysts point to signals that additional money is being transported out of the nation through back routes, indicating a further drop in confidence.

The movements, which are primarily out of the bond market, reflect the allure of higher interest rates abroad.

However, their scale and hints that they are extending beyond foreigners’ portfolios reflect domestic confidence fragility – a possible drag on the yuan in the future – and the magnetic influence of a rising US dollar on global capital flows.

“Everyone is suffering from the storm of U.S. interest rate rises,” said wealth manager Liu Yuan. “U.S. dollar assets are in the eye of the storm. It’s a haven of breeze and sunshine (while) life is hard on the periphery.”

Officially, China’s national financial accounts, which cover stock and bond markets and direct investment flows, show a net $101 billion was pulled out over the six months to June, putting 2022 on track to record the largest annual such outflows since 2016.

Monthly debt market data shows foreign investors have been net sellers for seven straight months to August as what had been a lucrative yield premium in China vanished as U.S. interest rates soared.

To be sure, exports mean China’s current account balance is still positive and not every asset class is seeing outflows – with equities actually attracting modest inflows.

But a sizable $45.2 billion net outflow in the balance of payments under the category as “errors and omissions,” has some economists suspecting that money is being moved out of the country via illegal or semi-legal channels.

“Errors and omissions basically reflect the exit of residents’ money in an unofficial way,” said Alicia García Herrero, chief Asia economist at French bank Natixis.

“It’s not only international asset managers that are no longer investing in China; undocumented outflows are worsening,” she says as confidence dwindles. “People want to withdraw their money.”

This year, the yuan has lost more than 11% of its value against the US dollar.

Unlike the majority of its global rivals, China is lowering lending rates to help its rapidly declining economy. The housing market, where most Chinese people invest their money, is in a slump, and youth unemployment is at an all-time high.

  • Reuters