China Macro:What is China’s actual capital outflow?

Exaggerated fear of China’s capital outflows

    Last week, the story of huge capital outflows from China caused market jitters.In this report, we will answer two questions: 1) What are the net moneyoutflows from China 2) What are the net money outflows from China underthe capital account We focus on the past five quarters (2Q14-2Q15) as thisis the critical period recent studies have focused on.

    The answer to the first question is: We estimate that China had net moneyinflows of US$67bn over the past five quarters. Therefore, investors don’tneed to worry about an imminent balance-of-payments (BoP) crisis. The pointis, although China saw huge money outflows through the capital account overthe past quarters (US$313bn according to our estimates), China ran a largesurplus in the current account amounting to US$380bn. Net net, China stillhad positive money inflows during this period (=US$380-313bn).

    The answer to the second question is: We estimate there were US$313bn ofcapital outflows from China under the capital account in the past five quarters.This is much smaller than the US$500-600bn estimated by the media.

    Then why did China’s FX reserves drop when there was net money inflowsThis was because lower FX reserves don’t necessarily correspond to moneyoutflows from China. There are four major factors to consider: 1) valuationeffect; 2) changes in domestic FX deposits; 3) changes in domestic banks’holding of FX assets; and 4) the impact of RMB trade settlement.