The Chinese market is tested by foreign flows and depreciating currency

HONG KONG — The withdrawal of foreign capital from China and a weaker yuan have drawn comparisons with 2015, when Beijing faced a vicious cycle of outflows and currency devaluation.

China has closed many of the loopholes that once allowed its people and companies to move money out of the country, making destabilizing migration of domestic funds less likely this time around.

But after years of international purchases of yuan-denominated stocks and bonds, some market participants are questioning whether that foreign outflow could dry up, driving down asset and currency prices. are not. A second pillar of the yuan’s strength is also faltering, as the extraordinary export boom enjoyed by China during the pandemic recedes.

In China’s bond market, April was the third consecutive month of significant outflows, data from China’s clearinghouses showed. In three months, foreign investors reduced their holdings by about 301.4 billion yuan, or 45.03 billion dollars.

Foreigners also withdrew from the Chinese stock market, net selling 33.2 billion yuan, or $4.9 billion, of domestic Chinese stocks through the Stock Connect trading link with Hong Kong from early March to Friday.

The yuan has weakened rapidly since mid-April, after trading in a tight range for months, and fell nearly 5% to around 6.69 against the dollar, according to FactSet. On May 12, it hit its weakest level in nearly 20 months, breaking above 6.82 against the dollar.

“Inevitably, the questions have begun. Is this a repeat of summer 2015? ” analysts at Barclays wrote in a note to clients in late April.

That year, the yuan depreciated modestly in a stock market sell-off that was followed by rush to pour capital for the exits. By the end of the year, China had spent about $700 billion of its foreign exchange reserves backing the currency.

However, the Barclays team argues that the comparisons are exaggerated. This time, Chinese policymakers have not injected huge amounts of money into the financial system, meaning there is no excess of liquidity looking for a way out. And Beijing has become much better at controlling capital in the country, they wrote. That helps explain why the 2019 price drop more than seven yuan to dollars did not lead to major capital flight.

Before the 2015-16 crisis, China’s focus was on containing hot money betting on a stronger yuan rather than stopping it out, said Becky Liu, head of China macro strategy at the Bank of China. Standard Chartered, said.

That means there are many channels for unauthorized offshore payments, Ms. Liu said. But not anymore, she said: “These holes have now been closed and outflows through legitimate channels have been and will likely continue to be managed.”

China’s State Administration of Foreign Exchange says it has adopted a zero-tolerance approach to violations of foreign exchange rules. The regulator, known as SAFE, says it has stepped up efforts to prevent and control money transfers through illegal channels.

Gene Ma, chief China economist at the Institute of International Finance, said the pandemic has curtailed travel, a former source of capital for households. And while there are legitimate avenues for individuals to convert money, such as an individual exchange quota of $50,000 a year, banks have a lot of discretion in how they handle operations. this, he said.

Chinese policymakers have pledged to support the economy, including internet technology field protected. They have recently taken steps to support an abundant housing market, such as cut long-term benchmark lending rates and make mortgages cheaper for first-time homebuyers.

However, global investors have plenty of reasons to be cautious. Beijing’s zero-Covid policies are causing economic strains, and the effects of its many corporate crackdowns are still reverberating. The yield advantage that Chinese bonds offer over their US equivalents has evaporated. And China’s reluctance to cut ties with Russia over Ukraine has raised questions about geopolitical risk.

Cash outflow was modest compared to the general holding rate of foreign investors. According to data from China’s central bank, as of December, overseas institutions held about $1.2 trillion of domestic assets denominated in yuan, split evenly between stocks and bonds.

The benchmark Shanghai Composite has rallied back about 9% since hitting a nearly two-year low in April, and last week the yuan regained some value. The net flow of stocks has turned positive recently.

Some international investors were also less pessimistic, showing that the buying power of foreign investors may increase again.

“The outlook for Chinese equities has improved,” said Andrew Swan, head of Asian and Japanese equities at Man GLG. He said the recent sell-off in the yuan wasn’t too big or worrisome, and that Chinese policymakers realized “now is the time to stimulate the economy.”

Guan Tao, chief global economist at Bank of China International Securities and a former senior SAFE official, said the actions of foreign investors could affect domestic market sentiment. However, he said China’s trade surplus is enough to offset the outflow and the long-term shift into the Chinese market will continue.

“China’s financial markets have just opened up, and most of the foreign capital is still in an ever-increasing allocation,” he said. “A huge amount of foreign capital is coming in.”

The benchmark Shanghai Composite has rebounded about 9% since hitting a nearly two-year low in April.


alex plavevski / Shutterstock

Likewise, SAFE says China’s growth remains relatively rapid, with yuan-denominated assets offering diversification and relatively high returns. It said the recent drop in prices was mainly due to international market trends and short-term changes in sentiment. The long-term allocation trend of foreign capital into yuan-denominated assets has not changed, the regulator said.

Like Mr. Guan, many market watchers say global investors are likely to remain long-term buyers of Chinese assets. They say the global investment community is still short of assets in the country, given the size of China’s economy and its market, and say that Chinese stocks help diversify investment portfolios.

Others are less optimistic. “Is this reversal a blip or is it a major inflection point? That’s the question facing markets today, said Logan Wright, director of China market research at Rhodium Group.

Mr. Wright said it was too early to answer that question, or to see if China was experiencing significant inland flows. But sustained cash flow will decline for China’s currency and asset values, he said. The People’s Bank of China is having to weigh the trade-offs between the internal and external effects of changes in its monetary policy, he said.

Freya Beamish, head of macro research at TS Lombard, said that in trying to generate strong growth while also pursuing a zero-Covid approach, the Chinese government is “fighting a losing battle, and something has to be given away”.

Beamish said China is likely to continue to expand its money supply, which it has kept relatively steady in recent times. That will put pressure on the yuan, also known as the renminbi.

“Which way you cut it, you will end up with liquidity being created, to put a floor below growth, or due to the fact that growth has slowed and the financial sector is unsustainable. . She said. “Capital outflows are a serious risk this year.”

Write letter for Rebecca Feng at rebecca.feng@wsj.comQuentin Webb at and Dave Sebastian at

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