China just reported its first capital account deficit since 1998.
But Standard Chartered’s Stephen Green and Wei Li write that there is no reason to worry about hot money flowing out of the country (money that moves from one country to another to benefit from interest rate differences or a change in exchange rate).
First, capital account outflows are actually slowing, and have gone from $52 billion in the third quarter, to $14 billion in the fourth. This suggests that capital outflows have slowed going into 2013.
Photo: Standard Chartered
With regards to capital outflows there are a few key things to keep in mind.
- Funds are moving out as wealthy Chinese put assets overseas.
- Outflows increase during times of stress and often these are cyclical and driven by changes in the behaviour of corporates that import and export from China.
- As long as the global and domestic economy continue to recover, an outflow like the kind seen in Q3 2012 is unlikely and in fact a small capital account surplus seems likely. “This means that CNY appreciation pressure will again be the story for 2013.”
So, it’s too early to worry about a run on China.