Since late September this year, the People’s Bank of China and the Ministry of Finance have successively implemented a series of market rescue measures such as the “three arrows,” leading to a rapid rebound in the stock market. However, official statistics show that in November, Chinese stocks saw a net outflow of 45.7 billion US dollars, reaching a record high for a single month; the total outflow from October to November even reached 71.5 billion US dollars. Some market observers have described the market rescue measures as a “cash machine” for foreign capital.
Economists analyze that the exodus of foreign capital is an early response to the future “US-China trade war.” The downward trend of the Chinese economy represents a structural change rather than a cyclical downturn. In the long term, there is a possibility of the Renminbi depreciating to 8 yuan against the US dollar.
Data released by the State Administration of Foreign Exchange of China on December 16th indicated that cross-border securities investment saw an inflow of 188.9 billion US dollars in November, but there was an outflow of as high as 234.6 billion US dollars, resulting in a net outflow of 45.7 billion US dollars, setting a new record for a single month and far exceeding the 25.8 billion US dollars net outflow in October.
According to a report by Caixin on the 22nd, the performance of consumption in China represented by the total retail sales of social consumer goods has been consistently weak since 2024, with even weaker growth rates in Beijing and Shanghai, the first-tier cities. In several months of the year, there has been a year-on-year decline, with the November monthly decline exceeding 10% in both cities.
As reported by Voice of America, the current round of market rescue measures by China has attracted foreign capital for short-term operations. However, “They quickly earn 10% to 20%, and then the funds quickly leave. If there is no significant rebound in December, foreign direct investment for the whole year may experience a net outflow for the first time since statistical data has been available since 1990.”
Regarding the record high net outflow of “hot money” from China in November and the possibility of setting a record for the first annual net outflow, Professor Fan Jiazhong of the National Taiwan University’s Economics Department told the Epoch Times that this is an early response of foreign capital to the arrival of the “Trump 2.0 era”, as there is a high possibility of Trump initiating various measures against China, including a trade war.
“There is a very important sign that the hawkish or wolf warrior stance of the Chinese Communist Party has not shown any signs of softening. In other words, it is actually prepared to confront the United States head-on and may not exclude negotiating with Trump. But I don’t think Beijing will make significant adjustments to its previous stance or make very obvious concessions,” he said.
Furthermore, Professor Fan Jiazhong discussed Trump’s concerns about China’s trade issues, including dumping, currency manipulation, and intellectual property theft, all of which harm American companies. The CCP must address these issues for Trump to be satisfied, but the CCP is neither able nor willing to do so. Therefore, it seems that there is very little room for maneuvering now, and the possibility of reaching an outcome that avoids a trade war, technology war, and financial war is very low.
Fan Jiazhong said, “So it seems that this trade war, tariff war will be more intense than in 2018. Foreign capital is retreating now because it anticipates this happening, so it’s taking action early.”
Amid pessimism towards the Chinese economy and stock market, several foreign institutions have successively published their investment outlooks for mainland China in 2025, with institutions like Goldman Sachs, and Fidelity International expressing optimism about the Chinese market prospects. Goldman Sachs predicts that the MSCI China Index will grow by 7% and 10% in 2025 and 2026, respectively. The index has already risen by over 15% since 2024 and is expected to achieve its first annual increase in four years.
Senior political and economic commentator Wu Jialong told the Epoch Times that foreign capital will continue to be bullish about the Chinese economy because it has to leave; it cannot let the Renminbi depreciate. Therefore, it will tout the market opportunities in China primarily as a means to exit. It deliberately sends out these messages because it will start speaking the truth after exiting.
Researcher Wang Guochen from the Chinese Academy of Economics Institute of Mainland Economics told the Epoch Times that there is little room for profit in entering the mainland stock market now, as there are not many price differentials to exploit. Additionally, China has always had a policy of being more open for foreign investment to come in but tight on regulating capital outflows, which renders it difficult for your money to leave. This is why foreign capital is leaving, as foreign investors see the situation very clearly.
Fan Jiazhong mentioned that whether the current economic downturn in China is a cyclical phenomenon or a structural change is a critical question. “If it is a cyclical phenomenon and is now at its low point, it is, of course, a good opportunity to enter the market because it will bounce back in the next two to three years. It’s called ‘seizing the opportunity amidst crisis.’ However, if it is a structural change, meaning its economic downturn is a long-term trend of 10 to 20 years, or even longer, if you enter now, you might still be halfway down the mountain and have to continue downward.”
From various signs, Fan Jiazhong believes that the central theme is a structural change this time. In other words, it is likely to follow the path of Japan after the bursting of the real estate bubble, experiencing 20 to 30 years of decline but not returning to the high-growth trajectory of the past. In this case, the investment risk is very high.
According to Reuters, against the backdrop of simultaneous relaxation of fiscal and monetary policies, Chinese bond yields have rapidly declined recently, with the 10-year bond yield dropping from over 2% to the current 1.8%, and the 30-year bond yield touched the 2% mark on December 13, hitting a new low since April 2002.
Regarding the rapid decline in Chinese bond yields, Fan Jiazhong believes that this indicates a severe deflation problem in China, and it will be very difficult to resolve in the short term.
According to an exclusive report by Reuters, the People’s Bank of China is considering allowing the Renminbi to depreciate to the level of 7.5 yuan against the US dollar to offset the economic impact of the trade war brought by Trump.
However, as reported by Voice of America, experts believe that foreign capital is still watching closely, as it is hard to assess the extent of harm the tariffs in Trump 2.0’s tariff war will have on China. Will the Beijing government allow the Renminbi to depreciate to 8 against the US dollar to offset the impact of high tariffs? The trend of foreign capital will only become clear after these factors are confirmed.
In response to this, Wang Guochen stated that within the control of the People’s Bank of China, it is not possible to reach 1 to 8; at most, it will depreciate to 7.5. If it goes beyond 7.5, a confidence crisis will arise, leading to an uncontrollable situation, where it might depreciate to 1 to 10.
According to a report by the US Treasury Department, as of the four quarters ending in June this year, China, Taiwan, Japan, and other seven economies have been listed on the “monitoring list” for exchange rate policies. The onshore price of the Renminbi has depreciated by about 2.6% this year. During the reciprocal tariff retaliation between China and the US from March 2018 to May 2020, the Renminbi’s depreciation exceeded 12%.
Wu Jialong stated that in the previous US-China trade war, the average tariff was around 20%, and the Renminbi had depreciated by up to 12%. This time, the new Trump administration claims to levy tariffs of over 60% on China, which is more than three times before. Therefore, the depreciation of the Renminbi will at least reach 20%. Using 1 to 7.2 as a basis for calculation, if it depreciates by 20%, 7.2 multiplied by 1.2 equals 8.64, so he believes that the likelihood of the Renminbi depreciating to 1 to 8 is considerable.
However, Fan Jiazhong believes that upon careful analysis, it is unlikely that the Chinese side will let the Renminbi depreciate too rapidly because the market will lose confidence in the Renminbi, leading to more severe consequences.
“However, intervening in the foreign exchange market incurs high costs. Does it have enough foreign exchange reserves to do so? Does it need to intervene to such a significant extent, or is it a matter of timing of intervention? These are all very uncertain,” said Fan Jiazhong.