2015-07-20

Yuan Depreciation Pressure More Sustained and Severe


Figure 3 shows that the current capital outflow episode in China is a more sustained and severe episode relative to those seen in the past. The last time China suffered significant capital outflows was during 2012 when $165bn of capital left during the last three quarters of that year. And before then, it was during the Lehman crisis when China suffered capital outflows, but much smaller in size (around $60bn of capital left China during the second half of 2008). So both the 2008 and the 2012 capital outflow episodes were much less severe than the current one. The $520bn that left China over the past five quarters more than reverses the $400bn which entered China during 2013 and the first quarter of 2014. This $520bn cumulative capital outflow from China over the past five quarters wipes out all previous capital inflows back to 2011, when China started downshifting.
To repeat: “the current capital outflow episode in China is a more sustained and severe episode relative to those seen in the past.” Now to see how the stock market puke affects it. The vol side definitely will by discouraging inflows and encouraging outflows but JPM’s Niko is right when he says that “portfolio flows are constrained by quotas and other restrictions. So in the balance of payments data, most capital outflows are concentrated in money market space rather than portfolio space or are disguised via trade flow.”
The last time the yuan faced depreciation pressure was 2008 and 2012, also the last time there were capital outflows. If outflows are larger this time, the yuan depreciation will be larger too.

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