China’s US$175bn outflow wasn’t investor flight: BIS

Beijing / Bloomberg

Persistent capital outflows from China since mid-2014 were probably driven more by local companies paying down their dollar-denominated debt — in anticipation a stronger US
currency — than investors ditching Chinese assets, according to the Bank for International
Settlements (BIS).
The outpouring of China’s currency “led to two different narratives,” researchers for the Switzerland-based institution said in a report on Sunday. “One tells a story of investors selling mainland assets en masse; the other of Chinese firms paying down their dollar debt. Our analysis favours the second view, but also points to what both narratives miss — the shrinkage of offshore renminbi
deposits.”
The BIS, which warned in December that emerging-market nations may be borrowing too much too quickly, examined a record $175 billion net decline in cross-border capital to China in the July-September period of 2015. Of that, the study showed just $12 billion of this was official reserves outflows, and the remainder was private outflows.
Almost three quarters of the $163 billion of non-reserve outflows was comprised of factors including a reduction in yuan deposits, which was counted as $80 billion in capital leaving the country, as well as local Chinese companies directly repaying $34 billion in foreign-currency debt to offshore banks and $7 billion to local banks.

Market Crash
The assertions by the 85-year-old institution, which coordinates the biggest central banks, sheds some light on China’s economic fragility, which has riveted investors ever since the $5 trillion stock
market crash last summer.
As the slowdown in Asia’s largest economy became more evident, it has roiled markets worldwide. China’s credit-rating outlook this month was lowered to negative from stable at Moody’s Investors Service, which highlighted the country’s surging debt burden and questioned the government’s ability to enact reforms.
The country’s total debt-to-GDP ratio surged to 247 percent last year from 166 percent in 2007, propelled by a lending binge in the aftermath of the global financial crisis.

Stable Yuan
Partial data suggested outflows from China continued in the fourth quarter of 2015. While the reduction of offshore yuan deposits slowed during the period, repayments of foreign-currency debt by companies accelerated, the BIS said. Price developments so far this year also suggested greater strains than in the second half of last year, it said.
The Chinese central bank’s “declared intention to keep the renminbi stable in effective terms would imply a weaker renminbi against the dollar were the dollar to appreciate against major currencies,” the Basel-based institution said. “In this event, offshore depositors might not hold onto maturing renminbi deposits and Chinese firms would still have reason to repay dollar-denominated debt.”