Capital is flowing out of China again, and at an accelerating rate. The yuan has fallen to a fresh six year low as capital flows out of the country. The WSJ reports that China’s foreign currency war chest, while still formidable, has plunged by almost $46 billion in October. Goldman Sachs says that the outflows from China are running at a rate of almost $80 billion per month.
While Beijing has tried to stem the outflows, the Chinese are finding ways to pull money out of the country.
“Can anyone tell me what has happened to the renminbi’s exchange rate? How much weaker can it become?” said Beijing schoolteacher Wang Fang, in a recent post on Chinese social-media app WeChat. In an interview, Ms. Wang said many of her friends have flocked to Hong Kong to buy foreign-currency-denominated insurance products—a popular way to stash money overseas—because of the heightened pace of yuan depreciation. “I certainly am thinking about that as well,” she said.
Chinese looking for ways to guard against yuan depreciation have been investing in everything from gold to the virtual currency bitcoin, whose value on Chinese exchanges has surged 17% since the end of September.
Also contributing to higher outflows are Chinese exporters like Sunstone Development Co., which makes carbon blocks used in the production of aluminum and sells a third of its products overseas annually. Like many such manufacturers, Sunstone is “in no rush” to convert its dollar earnings into yuan, chairman Lang Guanghui says. That means less foreign currency is flowing into China to counterbalance the money going out.
In the past year, Sunstone has also bet on a weaker currency with derivative contracts that earn money if the yuan drops.
China is the world’s second largest economy and the world’s low-cost manufacturing hub. Capital outflows from China and a depreciating yuan have implications not just for China, but for the entire global financial landscape. Stay tuned to developments here.
Jeremy Jones, CFA
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