span lang=EN-US style="FONT-SIZE: 11pt; FONT-FAMILY: Georgia">In September, China’s trade surplus and FDI reached $29.3 billion and $6.6 billion, respectively. But there’s a $14.5 billion gap between the sum of the two and the foreign exchange reserve growth, which totaled $21.4billion.
In the on-going global financial crisis, Beijing has long fretted over the enormous flows of unregulated ("hot") cash flooding into the country, not least because it didn’t know what the consequences would be if it started flowing out again. It now appears that they will have a chance to find out.
Sheng Songcheng, of the Shenyang Branch of the Peoples Bank of China, China’s central bank, said that in recent months, as the global and domestic financial situation has altered, overseas hot money has began to flow out of China rapidly. In recent years China’s international payment surplus has always been about 100% higher than its trade surplus, but recently this situation has changed and needs special attention.
Sheng said that, since July, profit remittance and payment in advance of foreign invested companies in some areas accelerated, while settlement of capital funds and foreign capital inflow began to slow down. The clear contrast indicates that concerns over capital outflow are reasonable. According to August figures, the trade surplus under the import and export account is $13.7 billion more than the surplus under international payments, meaning deficit has occurred in the capital account and overseas capital is flowing out. It is estimated the deficit will have grown in September.
Standard Chartered researcher Stephen Green has also found evidence of capital outflow. "We have observed that some multinational companies are withdrawing funds from China to relieve the tight fund supply at home. Meanwhile, the new foreign exchange collection and settlment system of the State Administration of Foreign Exchange has made foreign capital inflow more difficult than before August this year," he said.
According to Lu Zhengwei, macroeconomic analyst at the Industrial Bank of China, the slowdown of foreign exchange reserve growth in September may be led by an unwillingness to settle foreign exchange, since recently the RMB/USD exchange rate has fluctuated sharply, and depreciation expectation has occurred in the overseas non-deliverable forward market. But figures from the foreign exchange reserve may also indicate capital outflow. In fact, in August, when the central bank’s sterilization costs dropped to about 180 billion yuan, analysts announced the figure meant capital inflow was slowing down.Â
According to Stephen Green, due to the RMB appreciation slowdown and further fall in domestic real estate market prices, China is unlikely soon to attract further capital inflow. Investors may wish to put their funds into safer havens, though now it is hard to find such an Eden.
Many have thought that the global financial crisis might drive international capital into China for refuge, but in fact this is untenable. Due to losses in developed markets, companies urgently need to convert their Chinese investments into cash. That is why strategic investors of Chinese state-owned banks such as Royal Bank of Scotland and Bank of America have begun to sell their shares. Also, the prospects of the Chinese economy are not so optimistic as has been expected. Many leading indicators such as stock market figures, purchasing manager index (PMI), power generation, and steel production, are repeatedly indicating economic slowing. Investment bank analysts predict China’s economic growth in 2009 will drop to under 8%, which the government is going to find painful. And since China has begun to cut interest rates, both the RMB interest rate and exchange rate are no longer so attractive to outside capital. Recently, in fact, currencies in emerging markets such as Brazil, India, Russia, Malaysia, Singapore, Taiwan, Thailand, and Korea have all seen depreciation. Overseas funds will find no reason to stay in China.
For China, now the problem is to what extent can the country bear up under capital outflow? Will the worsening real economy push China into an abyss?
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