Markets have been concerned about capital flight since mid-2011 when fears of a Chinese hard landing began to resurface as well.
But Chinese capital flow number are often distorted by the use of yuan in trade international trade and Forex purchases.
A recent FT report for instance showed that part of the reason this is true is because importers haven’t converted their dollar receivables (money owed) or because they were converting more of their yuan into dollars.
Bank of America’s Ting Lu thinks capital flight peaked in the second quarter and projects that third quarter outflows could ease to $31 billion, from $68 billion in the second quarter. Here are some key points from his note:
- Capital flows could reverse quickly. In the past, we’ve seen $37 billion in capital flight in the second half of 2011, followed by $72 billion hot money inflow – speculative money that can quickly move in and out of a country – in Q1 2012 when markets turned overly optimistic about an economic growth recovery by overlooking the policy gridlock due to political infighting.” This was followed by $68 billion in capital flight again in the second quarter. “This volatile pattern suggests that people, both onshore and offshore, are neither resolutely bullish nor bearish about China and its currency.”
- Capital flight tumbled from $68 billion in Q2, to $31 billion (est.) in the third quarter, and was possibly reversed from mid-September based on “the amount of Forex converted to renminbi, RMB/USD onshore rates, the psychological or physical impact of QE3, and the recent volatile pattern of capital flow”.
- Hot money inflow in the fourth quarter could be moderate since their is little room for yuan appreciation. This is also in part because bearish sentiment on China continues and because the current recovery is moderate.
Ting doesn’t expect capital flight to be a “sustained big issue” for China. With the possible reversal of capital flight in the fourth quarter he now expects just one 50 basis points RRR cut before the end of 2012.
Here’s a look at China’s hot money flows since Q1 2010:
Photo: Bank of America Merrill Lynch
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