China Stanches Flow of Money Out of the Country, Data Suggests
HONG KONG — China rattled markets around the world last year when vast sums of money began flowing out of the country. Estimated at nearly $1 trillion, the money flows represented growing skepticism that China would be able to fix its deep problems and resume its place as a driver of global economic growth.
Doubts remain about Beijing’s ability to rev up slowing growth and patch up its frayed financial system. But new data suggests China has stanched, at least for now, the flow of money that had been pouring out of the country.
Chinese officials said on Thursday that the country’s hoard of foreign exchange reserves grew in March for the first time in five months. Those reserves — a $3.21 trillion pot of American dollars, euros, pounds and other currencies that China has accumulated over years of managing the value of its currency — are a rough proxy for money moving in and out of the country.
The growth signals a reversal from the winter, when worries about China’s growth and investor bets that the Chinese currency would weaken in value spurred swelling outflows of money, contributing to sell-offs in markets around the world.
The shift now stems mainly from weakness in the American dollar, but also from China’s increasingly aggressive efforts to keep its people from sending money out of the country. Stability in the reserves and even a slight increase in the value of China’s currency, the renminbi, against the dollar also indicate a shift in strategy, economists and bankers say, as Chinese officials have more forcefully spoken out about shoring up their country’s currency and have taken efforts to help economic growth.
What remains unclear is whether China will again start hemorrhaging money to the rest of the world if global financial markets deteriorate once more or if skepticism over the Chinese economy intensifies.
Worries that the renminbi would decline further against the dollar eased in March as the dollar itself weakened against practically every currency, including the renminbi.
As expectations of a short-term decline in the renminbi faded, Chinese investors mostly stopped rushing to move money out of the country. The People’s Bank of China, the central bank, said on Thursday that the country’s foreign exchange reserves had climbed $10.3 billion during March.
The reserves had declined $28.6 billion in February, $99.5 billion in January and $107.9 billion in December, an outflow that was fed by a gradual devaluation of the renminbi from mid-December through early January. Investors were moving their money out of China then for fear that it would otherwise have less buying power in dollars.
“The capital outflow is very much linked to renminbi depreciation expectations,” Shen Jianguang, a China economist at Mizuho Securities, said.
But the dollar weakened broadly in March as the Federal Reserve signaled that it had little appetite for interest rate increases this year. That made it less attractive for investors to shift their money to the United States. Confidence in China and emerging markets improved.
Zhou Xiaochuan, the governor of China’s central bank, and other Chinese policy makers helped stabilize the country’s reserves by making a series of public statements at the end of February saying that they saw no need for a further fall in the renminbi. They also hinted that China could do more to support flagging economic growth, although at the expense of adding to the country’s huge overhang of corporate debt.
As net outflows of money slowed in March, the total value of the reserves in dollars rose slightly, to $3.21 trillion. That appeared to be because part of the reserves are held in euro-denominated and yen-denominated bonds, and the euro and yen strengthened against the dollar last month.
Without currency valuation effects, the reserves would have fallen $20 billion to $30 billion — still less of a fall than in previous months without the valuation effect, economists estimated.
Many economists and traders say they believe that China will try to prevent a broad fall in the renminbi through early autumn. A weaker renminbi risks making China’s currency an election-year issue in the United States. The renminbi is also set on Oct. 1 to join a basket of currencies determined by the International Monetary Fund, a move Beijing is unlikely to imperil.
President Obama and other world leaders are scheduled to gather in early September in Hangzhou, China, for the annual Group of 20 summit meeting.
“Very few people think there will be a significant devaluation before the G-20,” said Michael Levi, a China specialist at the Council on Foreign Relations. “They’ve staked a lot of prestige on the G-20, and I don’t think they want it to be a fight over currency.”
One way that China has stabilized the currency in the past couple of months has been to place large bets in currency markets that the renminbi will stay close to its current exchange rate. Those bets have largely offset big bets by hedge funds that China will allow the renminbi to decline further.
After months of pressure from the International Monetary Fund, China’s central bank disclosed that the traded value of its contracts betting on the continued strength of the renminbi was $28.9 billion. By contrast, China had only $2.44 billion worth of contracts effectively betting on renminbi weakness.
The twin questions still facing China involve whether anything could happen before the United States presidential elections in early November to destabilize the renminbi, and whether the overall Chinese economy will have become strong enough by then for Chinese households and companies to want to keep their money at home.
If the dollar stops weakening in global currency markets before November and starts strengthening again, that would once more make the dollar more attractive to hold than the renminbi. And if China’s banking system encounters a sharp rise in defaults on its huge loans to troubled state-owned enterprises, that would also hurt the renminbi.