Washington / Beijing: According to the Washington-based trade association Institute of International Finance (IIF), China recorded the largest quarterly capital outflow recorded in the first quarter of 2022 due to Covid-19-induced lockdowns and depreciation of the Yuan.
During the period, investors sold shares and bonds in bulk, with local currency bonds accounting for the majority of the outflow. The portfolio outflow consisting of government and development bank bonds started in February and picked up speed in March.
Russia also sold part of its estimated 70 billion. USD in reserves allocated to China, which was also partly responsible for the huge outflow.
Investors have pulled out of China, the world’s second-largest economy, due to geopolitical tensions caused by the war between Russia and Ukraine, leading to business risks.
China recorded a portfolio outflow of $ 17.5 billion in March, a record high ever.
The outflow included DKK 11.2 billion. USD in bonds, while the rest were equities. The extent of capital outflow has reached an alarming level.
April was the third month in a row with significant outflows. Over the three months, foreign investors reduced their holdings by about 301.4 billion yuan, equivalent to $ 45.03 billion.
Foreign investors have been dumping Chinese stocks and bonds at a rapid pace over the past three months, while the yuan has come under strong depreciation pressure.
The last time China experienced such severe capital flight was in 2015-17, and it was only stopped by heavy capital controls and the release of foreign exchange reserves.
In addition to selling government bonds, foreign investors have dumped Chinese stocks, which has resulted in a stock market crash that has prompted officials to promise support for markets and the economy.
The “unprecedented” rate of capital outflow has alerted Beijing officials and prompted President Xi Jinping to warn of negative political contagion from “some countries.”
Investors have withdrawn money from China due to market expectations of further US Federal Reserve rate hikes, the Omicron outbreak in China and the war between Russia and Ukraine, and observers have warned that any misstep in the US Federal Reserve’s current interest rate cycle could come. at great cost to the Chinese economy.
Recently, in a move to tame inflation, US Federal Reserve Chairman Jerome Powell raised interest rates by 50 basis points, and interest rates are expected to rise above 2 percent from the current level of 0.25-0.5 percent.
In addition to raising interest rates, the Fed has a plan to reduce its record-high assets to $ 9 trillion in its balance sheet and could resort to throwing them away in the coming months.
China’s former deputy finance minister, Zhu Guangyao, acknowledged the dire situation, saying that “the current US monetary policy adjustment is undoubtedly unprecedented in terms of scope and pace, and this is the biggest pressure we are now facing.”
A bleak economic outlook caused by China’s tough zero-Covid strategy and a vanishing interest rate advantage over US government bonds is also putting pressure on the yuan.
In the last week of April, the Yuan weakened by almost 2 percent against the US dollar in the onshore market, exceeding $ 6.6 per dollar in offshore trading.
To control the volatility of the Yuan, the People’s Bank of China (PBOC) lowered banks’ foreign exchange reserves by one percentage point to 8 percent from May 15 to release about $ 10 billion to the market.
Chinese authorities have taken a number of measures to protect themselves against capital flight, as well as corporate losses on stock exchanges and market panic.
The State Administration of Foreign Exchange (SAFE) cracked down on exchange rate manipulation a year ago.
Since then, it has worked to persuade exporters to remain neutral on exchange rate risks, asking them to better manage their currency exposure and use hedging tools.
The battle lines have also been extended to overseas casinos, underground banks and bitcoin transactions.
Concerns about capital outflows and the yuan-US dollar exchange rate – a measure of external shocks – come amid dramatic changes in the Chinese economy over the past six months.
International investment banks such as UBS and Nomura have cut their economic growth forecasts for China.
The International Monetary Fund also reduced its 2022 estimate for the country from 4.8 percent to 4.4 percent, well below Beijing’s annual target of “about 5.5 percent.”
Amid weak economic growth prospects, many foreign investors are fleeing the Chinese market.