The Chinese yuan, already grappling with the effects of a sluggish economy, a surging dollar, and the possibility of increased US tariffs, is now facing a new challenge: a massive outflow of capital as Chinese investors seek better returns abroad. According to official data, last year saw record-breaking outflows in China’s capital account, which tracks the movement of capital in and out of the country. This shift, driven by domestic investors looking for opportunities overseas, marked an unprecedented trend where outflows related to capital and financial transactions surpassed those of the current account, which primarily tracks trade.
Such a shift has raised concerns about potential capital drains that could undermine Beijing’s control over the yuan. Experts warn that prolonged imbalances could prompt regulatory action aimed at curbing these outflows.
Philip McNicholas, an Asia sovereign strategist at Robeco Singapore, highlighted that the surge in capital and financial account flows signals a “bias for depreciation” of the yuan. He also pointed out the risk of reserve depletion if the currency remains stable. “The challenge for the People’s Bank of China (PBOC) is that weak growth makes it hard to attract growth-sensitive portfolio inflows, and concerns about foreign business viability in China have led multinational corporations to hesitate in their investments or, in some cases, pull back,” McNicholas explained.
The yuan has already lost around 2.8% of its value in the last three months, following a broader trend of Asian currency losses. This decline coincides with the dollar’s rise after Donald Trump’s election victory on November 5, 2024, and the yuan recently hit its lowest level since September 2023.
A Surge in Overseas Investment
In 2024, local Chinese banks transferred a net 1.33 trillion yuan ($182 billion) abroad, marking a new high, based on calculations. This figure accounts for both foreign investments into China and the overseas securities purchased by Chinese investors.
Several factors have contributed to the pressure on China’s capital account: a decline in foreign direct investment, growing interest from Chinese companies to expand abroad, and an exodus of funds from domestic stocks. These factors have collectively driven up demand for dollars, fueling larger outflows and causing increased yuan volatility. Additionally, the trade surplus, which reached a record $992 billion last year, is no longer providing the same level of support for the currency. Exporters have increasingly preferred to hold on to their dollar earnings, attracted by the higher yields offered by US assets.
Central Bank’s Tight Control
The PBOC has worked to counter the yuan’s slide, with a primary focus on preventing the depreciation from turning into a rout. Over recent weeks, the central bank has issued multiple warnings against actions it deems disruptive to the market. The PBOC has also tried to maintain control over the yuan’s value by adjusting its daily reference rate for onshore trading. To further stabilize the currency, the bank has taken steps to drain liquidity from offshore markets, including pledging a record amount of bill issuance in Hong Kong.
Le Xia, Chief Asia Economist at BBVA Hong Kong, noted that the growing influence of capital account flows could complicate the PBOC’s efforts to stabilize the yuan. “Given the current pressure on the yuan, officials may adopt stricter measures to manage capital outflows this year,” he said. “Such steps are necessary to maintain financial stability in the face of ongoing challenges.”
As the yuan faces mounting pressure from both external and internal factors, Beijing’s ability to manage its currency and maintain economic stability will be increasingly tested.
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