After three consecutive declines in China’s Foreign Reserves in the November-January period, which averaged nearly $100 billion per month (with particular attention paid to last month’s number), consensus expectations were for a moderation in reserve outflows in February to approximately $40 billion in February; moments ago the PBOC reported, that as expected, reserve outflow “slowed down” to just $28.6 billion, bringing China’s total foreign reserves to $3.2 trillion, the lowest level since early 2012.
With the February drop, Chinese total reserves are back to levels last seen in early 2012.
One factor for the slowdown in Chinese capital outflows may be the relative stability of the Chinese currency, which after suffering a substantial devaluation at the end of 2015 and early 2016, has since stabilized to levels during the start of year fixing. As Nathan Chow, a Hong Kong-based economist at DBS Group Holdings Ltd., told Bloomberg“financial markets were more stable last month compared with January and the sentiment toward the yuan has improved. Capital outflows may slow down in the second half of this year if economic fundamentals improve.”
Policy makers have been burning through their stockpile to help stabilize the currency, a key goal for China’s leaders, who are gathered this week for their annual policy meeting in Beijing. The nation’s defense of the yuan depleted its foreign reserves by $513 billion last year, while Bloomberg Intelligence estimates that a record $1 trillion of money moved overseas in 2015.
According to one theory proposed by the BIS, “persistent capital outflows from China since mid-2014 were probably driven more by local companies paying down dollar-denominated debt — in anticipation of a stronger U.S. currency — than investors ditching assets.” Those same BIS experts have probably never had the please of bidding for an abandoned house in Vancouver for $7 million, a local housing bubble which is precisely a function of local investors taking their money offshore in a panic.
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