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Chinese capital flight risks shouldn't be exaggerated

Editor: Li Kun 丨CCTV.com

10-08-2015 15:22 BJT

By Zhang Monan, Associate Researcher, China International Economic and Exchange Center

In recent months, the market has faced aggravating concerns over substantial outflows of Chinese cross-border capital. Data has shown that China's foreign exchange reserves reached US$3.99 trillion in June 2014.

After approaching a record level of nearly US$4 trillion, China’s foreign exchange has experienced a continuing decline to US$3.55 trillion in August, reaching the lowest point since 2013. This is the fourth consecutive quarter of declines.

Since last year, there's been a slowdown of economic growth in China. Accordingly, Federal Reserve (FED) interest rate expectations and the Yuan- Dollar hard link were led by middle price mechanism reforms of RMB as important factors to cause RMB devaluation expectations along with rising capital outflows.

All capital flows can be associated with global relevance and structural characteristics. The global quantitative tightening that was caused by the US entering a new financial cycle is the eminent inner force deserving to be characterized as follows: First, the reduction or even return of global capital flowing back to emerging economies.

The Institute of International Finance (IIF) expected that in 2014, cross-border capital flowing from the emerging markets will grow to US$1 trillion with a reduced scale of capital flowing into the emerging market in 2014; from US$1.145 trillion to US$1.112 trillion, the lowest since 2009.

Statistics compiled by the Global Emerging Portfolio Fund Research Company (EPFR Global) disclose that since mid July this year, the global funds' outflows have risen to more than US$40 billion.

Secondly, oil dollars shrinking are impacting capital flows.

In the past 10 years, the large number of "petrodollars" from oil exporters and producers has already flown into the global, especially emerging markets. The inflows of petrodollars have provided the global financial system with liquidity, which are boosting asset prices.

According to the IIF report, along with a plunge in international oil prices and shrinking petrodollars, it is expected that the 2014 net withdrawals of the emerging market energy exporter in the global market could reach $8 billion, accounting for the first net withdrawal in 18 years.

Additionally, there’s a significant influence of the US dollar valuation effect on capital flows.

A strong dollar would also overstate the reserves decline. US dollar strength makes foreign exchange assets in US dollars, which are held by the Central Banks of each country, have suffered market value declines.

During June 2014 to June 2015, the dollar index had risen by 18% (21.1% appreciation of the US dollar against the Euro during the period, 21.3% appreciation against the Yen, 8.6% against the British Pound).

Compared to reserves of RMB and the US dollar value, we estimate the valuation effect since June last year may have reached more than US$220 billion.

Nevertheless, we believe that markets should not worry too much over exaggerated claims of Chinese capital outflows. The RMB internationalization, cross-border RMB trade settlement and investments have already been transacting on a grand scale.

According to the 2015 Central Bank RMB Internationalizing Report, cross-border trade RMB settlement totals have increased from US$2.95 trillion 2012 to US$6.55 trillion 2014, with the 2013 year-on–year growth accounting for 57% and 2014 year-on –year growth at 41%.

In an overall deterioration of the trading environment in the second quarter of this year, the total cross-border RMB surplus (net inflow of cross-border RMB trade settlement +net foreign investment in cross-border RMB) has reached 352 billion yuan, a growth rate of 3.6%.

The total cross-border RMB flows surplus has reached the highest value recorded after the loss of the reserve achieving a historical high.

The Chinese foreign exchange reserve asset conversion has promoted the reserve "hidden remit to people", and the strategy of opening to trigger substantial capital outflows.

Meanwhile, Beijing is promoting the One Belt and One Road Initiatives to solve financing gaps on new platforms and models.

Yet the majority of these reserves related to the use of the funds may not have been reflected in the present statistics from the Central Bank.

Current financing sources include: the Asian Infrastructure and Investment Bank (AIIB), with its capital scale of US$100 billion, of which China has invested over US$40 billion. 

The Silk Road Fund has a capital scale of US$40 billion. Its funding sources of foreign exchange reserves, the China Investment Corporation, the export-import Bank, and China Development Bank (CDB) capital hold the capital ratio of 65%, 15%, 15% and 5%, respectively; National Bank of BRIC owns a capital scale of US $100 billion.

Nevertheless, through foreign exchange loans or increasing capital injection on policy banks, the People's Bank of China (PBOC) will use foreign exchange reserves to recapitalize to CDB and China Export and Import Bank, including two rounds of capital injections.

The first round of the bank's launch started last April, involving US$62 billion of funds. The second round was  in July, involving $83 billion.

Prospectively, Chinese foreign reserves face the likelihood of a long-period of declines along with China’s economic slowdown. The conversion of assets, caused by capital flow, however is exactly China’s response to the US Federal Reserve's quantitative easing measures.

 

( The opinions expressed here do not necessarily reflect the opinions of Panview or CCTV.com. )

 

 

Panview offers a new window of understanding the world as well as China through the views, opinions, and analysis of experts. We also welcome outside submissions, so feel free to send in your own editorials to "globalopinion@vip.cntv.cn" for consideration.

Panview offers an alternative angle on China and the rest of the world through the analyses and opinions of experts. We also welcome outside submissions, so feel free to send in your own editorials to "globalopinion@vip.cntv.cn" for consideration.

 

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