As Much as $850 Billion Left China So Far This Year

October 22, 2015 Updated: December 7, 2015

According to a very crude estimate, total capital outflows from China could have been as high as $850 billion from the start of 2015 to the end of September.

This estimate assumes China had to sell foreign exchange reserves ($329 billion to the end of September, mostly in U.S. Treasurys) to keep the exchange rate stable. Normally capital flight leads the exchange rate to depreciate. Private sellers of dollars demand a higher price for dollars before they would agree to buy up the excess quantity of yuan in international markets. By selling foreign currency reserves, China artificially stabilized the exchange rate, but you can quantify outflows by looking at the number of reserves sold.

The final number of reserves sold to prop up the exchange rate is the sum total of all foreign exchange movement going in and out of China. If it’s negative, there is money flowing out, if it is positive, there is money flowing in. Here, it is important to distinguish between capital flows and trade flows.

Trade flows show how competitive an economy is in the production of goods and services. Capital flows show how investors view the risks and returns in that country.

So if there is a lot of money flowing in through trade and China still sells reserves to prop up the exchange rate, it means for every trade dollar earned more investment dollars are leaving the country. In the past, this was the opposite. Trade dollars stayed in China and there was more money coming after it.

The trade surplus to the end of September 2015 was $426 billion. Another $94 billion came in through foreign direct investment over the same period. Again, if there is a dollar of foreign direct investment coming in and China sells reserves to keep the exchange rate stable, this means another investment dollar (or more) left the country.

Chart of China's total foreign exchange reserves (Bloomberg)
Chart of China’s total foreign exchange reserves. (Bloomberg)

So even this gigantic sum of more than half a trillion is not enough to counter the outflows, putting the currency under pressure. While previously the central bank of China had to print and sell yuan to absorb these inflows, by selling reserves to stabilize the exchange rate means there is more money going out than flowing in. This number is reflected in the amount of foreign exchange reserves sold. So by adding up these three elements, you arrive at a crude estimate of the outflows this year: $850 billion. 

Why crude? The estimate ignores some numbers because they are out of date. For example, China only updated its balance of payments data for the second quarter of 2015 (the data is to June 30) on Oct. 22. So we don’t have updates on “other investments” into China, which was a negative $193 billion for the first two quarters anyway. 

Other numbers are hard to interpret and out of date, like the “net errors and omissions” category. It was a negative $90 billion for the first six months of the year and could represent anything. The whole capital account recorded a deficit of $60 billion for the first two quarters of 2015, including foreign direct investment (positive) and foreign exchange reserves (negative).    

Given the other factors of the capital account were negative at the end of the second quarter of 2015, ignoring this data and working with the more up to date data (foreign direct investment, trade data, and foreign exchange sales) is even flattering for the outflows, assuming the trend continued. The only thing excluded in the estimate actually reducing it would be the services deficit. It was $95 billion until the end of June, and the logic works in reverse of the one for the trade surplus.

It also doesn’t factor in currency fluctuations, which are impossible to quantify because China doesn’t disclose the exact composition of its reserves. So the final number could be lower, but it could also be higher. Whatever the final number may be, it is higher than ever and too high for the transition to a consumer economy to be real.

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