Financial Decoupling: What, Me Worry?

Following Didi’s sudden announcement, concerns about a wave of delistings of Chinese stocks from US exchanges have risen while institutional investors have been grappling with new regulatory and political risks emerging from Beijing. Yet despite these issues, foreign portfolio investments have continued pouring into China’s equity and fixed income markets this year at a pace of around $140-150 billion annualized on net, down only slightly from 2020 levels.

Strong capital inflows and record trade surpluses explain why China is less vulnerable to a sudden depreciation of its currency than in 2015, even as the PBOC’s monetary policy trajectory will diverge from the Fed’s, and the RMB has surged back to early 2015 levels on a trade-weighted basis. However, foreign portfolio inflows and trade surpluses should moderate in 2022, and the balance of risks to the currency clearly points to more weakness ahead.

Posted December 13, 2021
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