Renminbi retreat set to revive capital outflows pressure – Financial Times

By | August 15, 2019

15/08/2019 Renminbi retreat set to revive capital outflows pressure | Financial Times

Chinese capital controls (See my comments…)

Renminbi retreat set to revive capital outflows pressure
Breach of key threshold sees currency and its regulator face challenges on many fronts

Don Weinland in Beijing 9 HOURS AGO

The renminbi’s fall through the closely watched and previously well-defended threshold of Rmb7 to the US dollar last week has added to pressure on the Chinese currency on multiple fronts — posing a challenge for the foreign exchange watchdog, which is keen to keep capital flight in check.

Sudden declines in the value of China’s currency often prompt rich Chinese people to move money into US dollars or assets such as foreign real estate to avoid further wealth depreciation.

In addition, as the currency loses value against the dollar, Chinese companies with large US dollar debts are forced to exchange greater amounts of renminbi to make payments on offshore bonds. Strategists also fear the country will attract less foreign investment, a crucial source of capital inflows that help underpin the currency.

“Capital outflow pressure didn’t start on Monday [last week] but we expect it to see a strong increase,” said Alicia García Herrero, chief economist for Natixis in Asia Pacific. “This is going to cause people to recalculate investing in China this year.”

Capital outflows jumped to $85bn in the second quarter of the year from about $21bn in the first quarter. However, there was only a small outflow in July from the country’s foreign exchange reserves, which remained relatively stable at $3.1tn.

China has waged war on capital flight ever since the central bank’s shock 1.9 per cent devaluation of the renminbi in August 2015. In the year following that move, analysts estimated that more than $1tn flowed out of the country’s capital account, sparking concerns that its foreign reserves — a war chest for preventing a full-blown currency crisis — were running low. By January 2017, foreign

reserves were below $3tn for the first time in five years.

Since then the foreign exchange regulator has cracked down on backdoor channels for moving cash offshore, namely by stopping companies from making speculative real-estate and entertainment investments overseas — a campaign that has been largely effective in stemming serious outflows.

“The days of easy tricks to move capital offshore from China are gone due to tighter restrictions by the State Administration of Foreign Exchange,” said Andrew Collier, managing director at Orient Capital Research in Hong Kong. “However, there are limits, as large adjustments could trigger massive domestic offshore pressure due to concerns about a substantial weakening of the currency.”

One way capital is continuing to flow out of the country is through companies in second-tier cities, according to research by Mr Collier for GlobalSource Partners.

Such companies, which face less regulatory scrutiny than those in Beijing or Shanghai, have quotas for overseas direct investment that they offer to wealthy individuals for a fee, making use of a

loophole in a legal grey area. On paper, investments are made by the companies but much of the cash backing deals done via those quotas comes from people looking to move their money into overseas assets, the research suggests.

Still, some analysts say the heaviest pressure on China’s capital account will come not from investors attempting to escape a depreciating currency but from companies making payments on hundreds of billions of dollars in offshore debt.

Chinese companies have gone on a US dollar debt-raising binge in recent years. This year alone they have added more than $600bn to a debt pile that now totals about $3.5tn, according to Kevin Lai, chief economist for Asia ex-Japan at Daiwa Capital Markets.

Most Chinese companies will repay that debt by exchanging renminbi for dollars, and as the currency weakens the amount of renminbi they must exchange to make payments on those bonds increases.

“The need to move money offshore has existed for a long time but now corporates are under much more pressure to get out,” said Mr Lai. “With the [renminbi] breaking 7 [to the dollar] this is going to shake up everybody.”

China’s currency was trading at 7.04 per dollar on Wednesday, having weakened by about 5.3 per cent since February.

15/08/2019 Renminbi retreat set to revive capital outflows pressure | Financial Times

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