China faces trouble over currency mass outflow

Beijing / AFP

China is struggling to reconcile its push for economic reforms and a freely traded currency with curbing massive outflows of capital sparked by worries over its slowing economy — and a lack of communication is fuelling fear.
The thorny problem represents the so-called “impossible trinity”, as China’s ruling Communist Party seeks to control the exchange rate and monetary policy, while at the same time moving to freer capital flows, analysts said.
Around US$1.0 trillion left China last year, according to Bloomberg Intelligence. In December alone capital outflow from the country was nearly US$160 billion, it said.
The cash haemorrhage reflects growing concern about the economy against a backdrop of volatility in the stock and currency markets, which has led both investors and savers to shed their yuan, also known as the renminbi (RMB).
“The recent flood of capital leaving China has been driven primarily by increased scepticism that the People’s Bank (the central bank) will hold to its pledge to keep the renminbi stable,” said Mark Williams, chief Asia economist at Capital Economics.
At the recent World Economic Forum in Davos, billionaire investor George Soros told Bloomberg TV that the world’s second largest economy, where growth has already slowed to a 25-year low, was heading for more trouble.
“A hard landing is practically unavoidable,” he said, pointing to deflation and excessive debt as a reason for China’s slowdown.
His remarks angered the Chinese media, which accused him of “declaring war” on the currency.
Soros, whose enormous trades are still blamed in some countries for contributing to the Asian financial crisis of 1997, in the 1990s led speculators in bets against the Bank of England, which unsuccessfully sought to defend the pound’s exchange rate peg.