China is grappling with the largest capital flight in years, raising concerns for authorities as Beijing exerts additional pressure on the yuan, which is already under strain due to a widening Sino-U.S. yield gap and mounting concerns about the Middle East crisis.
Goldman Sachs’s preferred gauge of foreign exchange flows report published on Oct. 20 showed capital outflows from China surged to $75 billion in September, the highest monthly amount since 2016, compared to the $42 billion outflows in August. This increase occurred despite smaller outflows by the foreign portfolio investment channel, it added.
“Foreign investors’ net selling of equities and bonds slowed, but the current account showed net outflows in September on the back of faster services trade outflows, lower goods trade related inflows and higher income and transfer outflows,” said the Goldman Sachs’s note accessed by The Epoch Times.
According to Goldman Sachs’s Stock Connect, the outflow was $12 billion compared to $22 billion outflows in August. In September, foreigners purchased $2 billion in domestic bonds, reversing the previous two months’ selling.
The exodus pushed the yuan well past its daily trading limit, with onshore spot yuan trading at around 7.32 to the dollar at midday on Monday at the Shanghai currency market. The Chinese currency at the day’s close, however, was 1.93 percent weaker—close to the 2 percent limit—as the People’s Bank of China (PBOC) maintained the guiding rate at 7.18 per U.S. dollar “with a strong fixing bias.”
“This persistent weakness in the Chinese yuan can be attributed to several factors,” Sugandha Sachdeva, executive director and chief strategist at Acme Investment Advisors, told The Epoch Times.
More than 1,400 people were killed and 4,834 injured in Israel since Hamas launched a surprise attack on Israel on Oct. 7. Hamas also took over 200 hostages, including U.S. citizens and other foreigners.
In retaliation, Israel has aimed its airstrikes at Hamas targets in Gaza and imposed a complete siege, cutting off the food, water, and fuel that it had voluntarily supplied into Gaza prior to the Oct. 7 attack, until Hamas frees all hostages.
“These factors are attracting investors seeking the safety of the U.S. dollar, which is exerting downward pressure on the yuan,” she said.
According to Reuters, the spread between 10-year treasury yields in the United States and China increased to more than 226 basis points on Monday, the widest in more than two decades.
“Moreover, concerns surrounding the Chinese real estate sector, a narrowing current account surplus, and the differing monetary policies of the U.S. and Chinese central banks have all contributed to the depreciation of the yuan,” said Ms. Sachdeva, all of which “have created a challenging environment for the currency.”
Despite a large trade surplus, China’s current account showed net outflows month-on-month “despite the elevated goods trade surplus,” according to Goldman Sachs data. September’s net inflow was $15 billion, lower than the $26 billion in August.
Faltering Economy
The capital flight also comes as Beijing risks missing its 5 percent growth target for the year due to a sluggish economy. The most recent data from the National Bureau of Statistics (NBS) revealed that growth in the world’s second-largest economy slowed to 4.9 percent on the year in the July–September period, down from 6.3 percent the previous quarter.The NBS also warned that the external environment was growing “more complex and grave” and that domestic demand was still insufficient.
After nearly three years of “zero-COVID” restrictions, China opened its economy in late 2022, providing an instant boost early this year as more people rushed to stores and eateries.
However, the post-pandemic rush suddenly stalled soon after—and earlier than anticipated—as analysts predicted that growth would likely fall to 4.5 percent in 2023.
Consequently, according to data issued on Friday by China Central Depository & Clearing Co, foreign funds reduced their holdings of Chinese sovereign bonds by 13.5 billion yuan (about $1.85 billion) in September. Their entire debt holding fell to 2.07 trillion yuan, the lowest since March 2021.
The depletion of China’s foreign exchange (FX) reserve also took its toll. According to Goldman Sachs’s analysis, the official FX reserve (released earlier in the month) declined to $3,115 billion in September from $3,160 billion in August.
Propping Up Yuan
Chinese regulators are trying to talk up the yuan.Over the weekend, for example, PBOC Governor Pan Gongsheng stated that China would minimize risk contagion in stock, bond, and foreign exchange markets, as well as guarantee financial market stability.
Besides, Goldman Sachs added, China’s central bank is also maintaining a strengthening bias in the daily yuan-to-dollar fixing rate, keeping the U.S.-yuan rate around 7.30 for the past one and a half months.
“In response to China’s challenges, it is anticipated that the PBOC will intensify its efforts in the foreign exchange markets to stabilize the yuan and prevent a disorderly depreciation,” said Ms. Sachdeva.
Still, analysts say that given the significant outflows, having dropped more than 5.5 percent against the dollar and emerging as one of the worst-performing currencies in Asia this year, the yuan will almost certainly continue to devalue against the dollar in the coming months.
“We reckon that the range of 7.40 yuan to 7.50 yuan per dollar represents a significant support level for the currency. Only if this support is breached, we may witness a substantial depreciation,” said Ms. Sachdeva.
Goldman Sachs said it will maintain its year-end yuan projection of 7.30 yuan per dollar on the back of Beijing’s efforts to restrict the currency’s slide.
Overall, Ms. Sachdeva concluded the PBOC’s actions and market dynamics will play a crucial role in determining the future trajectory of the yuan.
