With the US dollar now officially primed and weaponized amid growing speculation that the Trump administration is contemplating busting the Hong Kong-US Dollar peg as a means of destabilizing China’s financial system as the Cold War between the US and China rolls out in earnest, attention is (or should be) again shifting to China’s capital outflows (especially with Chinese banks suddenly hit by an unprecedented surge in bank runs).
Addressing this issue, Goldman writes overnight that according to the bank’s preffered gauge of FX flows, there was an outflow of around US$9bn in June (vs. US$19bn inflows in May), and the most since the March crisis, with seasonal investment income payout contributing to the outflows in June, while net foreign buying of Chinese equities and bonds remained strong. Still, as the chart below clearly shows, the June outflow was tiny in comparison to the massive capital flight observed in late 2015 and 2016, following China’s surprise yuan devaluation.
Overall net FX outflows composed of US$12bn in net outflows via outright spot transactions, US$8bn in net inflow via forward transactions, and US$5bn outflows in cross-border RMB net payments from onshore to offshore.
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Some more details from Goldman on this latest net outflow, which according to the bank’s calculations based on the SAFE dataset of “onshore FX settlement”, non-banks showed net FX outflows of around US$4bn in June (vs. US$18bn inflows in May). This is composed of US$12bn in net outflows via outright spot transactions, and US$8bn in net inflow via freshly entered and canceled forward transactions. Another SAFE dataset on “cross-border RMB flows” shows that on a net basis, domestic banks saw net RMB payments of US$5bn from onshore to offshore. In summary, Goldman’s preferred FX flow measure therefore suggest in total US$9bn outflows in June, in comparison with the US$19bn inflows in May.
Investment income payout contributed to the outflows in June. Cross-border net payments under “current account – income and transfers” rose to US$21bn in June, vs US$14bn in May (a majority of them are likely denominated in RMB) and net FX sales for “current account – income and transfers” went up to US$8bn, from US$3bn in May. Investment income payout tends to be seasonal with June being the peak season of payouts – on average in the past three years, investment income payout tends to drive US$14bn more outflows in June in comparison with May. A smaller goods trade surplus and thus smaller net FX inflows through the goods trade channel also contributed to the overall net outflows in June.
Foreign buying of Chinese bonds and equities continued to be strong – bond foreign inflows were US$11bn in June, vs US$16bn in May, and net northbound buying through the Stock Connect program was around US$4bn in June, vs US$1bn in May.
SAFE data on cross-border trade receipts suggest the goods trade repatriation ratio (net foreign receipts under goods trade channel as a share of goods trade surplus) was at 37% in Q2, higher than the 30% in Q1, likely on the back of improved sentiment towards the currency later in the quarter – the CNY appreciated against USD by around 1% in June.
Official FX reserves (released earlier in the month) stood at US$3,112bn in June, US$11bn higher than May. Based on our estimate, FX valuation effects accounted for most of the increase. After adjusting for the FX valuation effect, FX reserves increased by US$1bn in June.