The flight of capital from China should ease this year after a torrid 2015 but the pace could pick up again on renewed doubts about the stability of the yuan, according to a new report.
The faltering Chinese economy spurred massive net capital outflows of close to $675 billion in 2015, driven mainly by foreign banks cutting credit to Chinese firms, the firms themselves paying back their debt or international investors reducing holdings of yuan, or rennimbi, deposits.
But the Institute of International Finance predicted Monday that outflows would decline by a fifth this year, to $538 billion, diminishing in intensity “as policymakers persuade investors that they will be successful in stabilizing the RMB’s value.”
In March, net capital outflows were around $35 billion in March, bringing total outflows in the first quarter to around $175 billion. “This is well below the rates seen in the second half of the last year, when the fears over disorderly RMB depreciation induced heavy capital flight,” the IIF said.
Greater confidence that the economy is on track to meet the Chinese government’s 2016 growth target of 6.5% to 7% would also help ease outflows, according to the institute, which also noted that emerging markets in the aggregate experienced sizeable portfolio inflows in March.
But the report also warned that “China remains vulnerable to a renewed intensification of capital outflows, particularly if doubts about the stability of the RMB were to come to the fore again. In particular, stress could rise through a combination of a stronger [U.S. dollar] — particularly if the market comes to believe that the Fed will tighten more quickly than currently priced in — and further disappointment about China’s growth momentum.”
Chinese authorities have made progress in easing worries about the yuan’s direction but as Reuters reports, “one ‘important unknown’ is the threshold of currency reserves below which Chinese authorities would start to worry. They might then either allow the yuan to fall again or markedly tighten capital controls.”
“A sharp drop in the renminbi would likely spark a renewed sell-off of global risk assets and trigger a flight of portfolio capital from emerging markets,” the IIF said.