“Home Bias” Fading for Chinese Households and Corporates

China’s State Administration of Foreign Exchange (SAFE) released preliminary data for China’s Q1 2016 balance of payments (BOP) last week, showing a current account surplus of $48.1 billion and a financial account deficit of $171.2 billion, resulting in a $123.3 billion drop in China’s foreign exchange reserves.  This note reviews the latest BOP data in the context of recent macro developments.  The key points are:

FDI balance continues to deteriorate: The surge in outbound M&A investment by Chinese companies has been one of the key stories in global markets in 2016, and the BOP data confirm that the secular growth in outbound investment activity has accelerated in recent months.  At the same time, inflows under the foreign direct investment (FDI) channel have moderated, producing the largest FDI deficit in China’s history, at $22.9 billion.

Ballooning services trade deficit drives down current account surplus: Evidence of diversification of China’s household savings is appearing indirectly via China’s expanding services trade deficit, which has been driven by tourism-related outflows.  China’s goods trade surplus remains high as domestic demand has softened, but the overall payments balance is now driven by other factors.

External deleveraging slows: Most of China’s capital outflows over the past two years have been driven by paydown of external debt, but that process has slowed down in Q4 2015 and Q1 2016.  This suggests that pressure on the currency has moderated in the short term, consistent with recent foreign exchange reserve data, but may persist as foreign debt continues maturing.

Posted August 1, 2017
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