Posted: Tuesday 10th January, 2017
«The domestic capital outflows in 2016 are expected to exceed $160 billion this year, up from $100 billion in 2015. The growth rate is too fast, not to mention that a big part of that cash flow might be illegal,» Dong Dengxin, director of the Finance and Securities Institute at Wuhan University of Science and Technology, told Chinese journalists.
Capital flight is both the cause, and result of weakening currency. Funds flow out of China because people are pessimistic about the economy and want greater returns on their assets. This drives down the yuan, triggering a vicious cycle in which Chinese investors seek foreign investments to protect themselves against the weakening yuan.
«Chinese are converting their RMB savings into dollars and investing abroad. When Chinese convert RMB into dollars, China uses its U.S. dollar holdings to buy the yuan. If it did not do so there would quickly be an imbalance between buyers and sellers of yuan and the value of the yuan would plummet,» said Paul Gillis, professor of accountancy at the Peking University’s Guanghua School of Management.
Market sources expect the yuan to further weaken against the dollar, despite government efforts to prop it up. The strengthening dollar and possible adverse actions against Chinese business by the next U.S. president might batter the currency in the coming weeks.
«I think the dollar will continue to strengthen and hence the pressure on the RMB to fall continue as the Fed raises interest rates. Only when the U.S. economy performs worse than expected will the dollar stop rising and pressure on the RMB ease,» Kirkegaard said. «I expect Beijing to continue to tighten capital controls in the near term to try to conserve as many forex reserves as possible.»