(Bloomberg) — As if the yuan wasn’t already under pressure from the weak Chinese economy, a surging dollar and the prospect of higher US tariffs, the currency faces an additional downdraft: a flood of money looking to invest overseas.
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China’s capital account, which tracks flows of capital in and out of the country, saw a record outflow last year as investors looked for better returns abroad. As a result, payments made by banks on behalf of their clients for capital and financial transactions surpassed those for the current account, which mainly relates to trade, according to official data.
That’s unprecedented. An extension of that imbalance is likely to raise fears of serious capital drains, undercutting Beijing’s ability to manage the yuan and increasing the chance of a regulatory crackdown.
The fact that China’s capital and financial account flows have increased greatly “suggests a bias for depreciation, or, if the currency is unchanged, of reserve depletion,” said Philip McNicholas, an Asia sovereign strategist at Robeco Singapore.
“The challenge for the People’s Bank of China is that weak growth is making it hard to attract growth-sensitive portfolio inflows and risks around foreign business viability in China is making multinational corporations reluctant to add to, or in some cases, leave or sell, investments there,” he said.
The yuan has tumbled about 2.8% over the past three months, tracking losses by all of its Asian peers, as the dollar surged following Donald Trump’s Nov. 5 election victory. China’s currency this month slid to the weakest level since September 2023.
Heading Overseas
China’s local banks sent a net 1.33 trillion yuan ($182 billion) of funds overseas on behalf of their clients for investments last year, a record based on Bloomberg calculations. That total takes into account foreign investment into the country, as well as purchases of overseas securities by local investors.
The nation’s capital account has come under pressure due to the decline of foreign direct investment flows into the country, the appetite for local companies to expand overseas, and an exodus of funds from local stocks. The combination of these factors has led to higher demand for dollars, larger outflows and greater yuan volatility.
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Meanwhile, the support offered by the nation’s multi-year trade surplus — which climbed to a record $992 billion last year — has been gradually diminishing. Exporters have preferred to hold on to their dollar earnings due to the yield premium of US assets over Chinese ones.
Tight Control
One of the main items on the PBOC’s agenda over the past year has been preventing the yuan’s decline from turning into a rout.
The central bank in recent weeks has delivered multiple warnings against behavior it considers market disruptive, and has sought to retain a tight grip on the currency through its daily reference rate for onshore trading. The authority has also acted to drain liquidity in offshore markets by pledging a record amount of bill issuance in Hong Kong.
The increasing impact of capital-account flows on the yuan is likely to further complicate the PBOC’s efforts to support the currency, said Le Xia, chief Asia economist at BBVA Hong Kong.
“Given the current pressure on the yuan, officials’ management of capital account outflows may be more stringent this year,” he said. “That’s a reasonable thing to do considering the need to maintain financial stability.”
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