In attempt to mitigate continued capital outflows from the country, China’s central bank, the People’s Bank of China (PBOC), likely spent around $US72 billion to defend the Chinese yuan in December, according to calculations from the Commonwealth Bank of Australia (CBA).
In a note released on Monday, Wei Li, China and Asia economist at the bank, said that while China’s FX reserves decreased by only $US41 billion to $US3.01 trillion in December, the level of net capital outflows, and subsequent intervention from the PBOC, was nearly twice as much.
“According to our calculations, valuation effects — changes in FX reserves caused by exchange rate fluctuations and investment returns — resulted in an increase of $US35 billion in China’s FX reserves in December. However, the gain was more than offset by negative transaction effects that totaled $US79 billion in December,” said Li.
In other words, we think the scale of the PBOC’s support for the CNY in the FX market — by selling US dollars — has increased in December.
Li estimates that net capital outflows likely accelerated last month, rivaling those seen in December 2015 and January 2016 when investors were seriously concerned about the health of the world’s second largest economy.
“Assuming a trade surplus of $US45 billion, we estimate China saw net capital outflows of $US93 billion in December,” he says.
This chart from the CBA shows how that figure ranks in terms of past outflows recorded. With the exception of late 2015 and early 2016, the estimated capital outflows seen in December was the highest level on record.
However, as opposed to the reaction seen this time when markets were crumbling, Li believes there’s a simple explanation as to why investors are more sanguine to the acceleration in capital outflows seen this time around.
It’s largely due to expectations that the US economy will strengthen, rather than that the Chinese economy is weakening.
“What is different this time is that a broad-based USD strengthening, triggered by Trump’s win of the US presidential election and higher US interest rates, appears to be the major cause of rising capital outflows from China into the USD, resulting in a weaker CNY,” he says.
You could also argue that relative stability in China’s stock market — something that was not present at this point last year — may also be contributing to the markets relaxed attitude to the latest acceleration in Chinese capital outflow.
Even with the PBOC’s intervention in the FX market during December, the US dollar still strengthened by 0.86% against the yuan, leaving its gain in 2016 at nearly 7%.
While the US dollar has weakened against the yuan late last week — largely as a result of a broader pullback in the greenback and further intervention from the PBOC in the offshore traded yuan market — it’s clear that downward pressure on the yuan remains firmly entrenched.