China’s capital outflows intensified in April, highlighting the resistance faced by the Renminbi amidst a sluggish domestic economy and uncertainty over the Federal Reserve’s interest rate hikes.
According to official data released by Bloomberg on Friday (May 16), Chinese domestic companies recorded the highest foreign exchange purchases from banks since 2016 in April. Exporters are also holding off on converting dollars to Renminbi, while Chinese residents are rushing to purchase foreign exchange for overseas travel.
These factors indicate caution towards the Renminbi as the lower interest rates in China compared to the United States favor the dollar. Despite the People’s Bank of China’s efforts to maintain the Renminbi exchange rate within a narrow range, the uncertainty surrounding the timing and extent of the Fed’s rate cuts has made the central bank’s job more challenging.
Economists and strategists at Goldman Sachs Group Inc., including Xinquan Chen, expressed in a report that given the mounting pressure of capital outflows, “we expect policymakers to maintain strict controls through strong Renminbi pricing and offshore liquidity management to resist devaluation expectations.”
Here is an overview of capital flows in China in April:
Data from the State Administration of Foreign Exchange shows that in April, Chinese banks net sold $36.7 billion worth of foreign exchange to customers, marking the highest level since December 2016.
Investors favored foreign exchange assets under capital projects in April, indicating a more positive outlook on non-Renminbi-denominated securities. The current account also does not support the Renminbi as it shows a net purchase of foreign currencies, a rare scenario given China’s long-standing trade surplus. The deficit related to outbound travel services increased.
Dan Wang, Chief economist at Hang Seng Bank (China) Ltd., mentioned, “Given the expectations of weak economic growth in China and continued capital outflows, exporters are more inclined to hold foreign exchange rather than Renminbi.”
Chinese banks on behalf of clients made a net outflow of $29.5 billion in direct investments, reaching a historical high. This includes investments from foreigners in China as well as China’s investments abroad.
Gerard DiPippo, an analyst at Bloomberg, noted in a report last week that the decline in foreign direct investment inflows into China may primarily reflect the relatively higher interest rates in the United States rather than waning interest from foreign companies in China. He further mentioned that non-private enterprises, including Chinese companies with offices in Hong Kong, may have already transferred cash overseas to benefit from higher yield rates.