Subtle Shifts in Capital Flows

China’s currency has appreciated to its strongest level against a trade-weighted basket since the summer of 2015, preceding the shock August depreciation that year. But current conditions in China’s balance of payments are very different from that time, with China’s closed borders keeping tourism-related outflows and capital outflows at bay. Nevertheless, details of the 2Q 2021 balance of payments data show that flows are shifting marginally, with capital inflows weaker than last year and capital outflows picking up. The case for further yuan appreciation from current levels has eroded. Even if there are considerable obstacles to sustained currency depreciation while China’s borders stay closed, risks are shifting in that direction.

Posted October 15, 2021
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Ends and Means

In the absence of a declared bailout or workout for Evergrande, contagion is spreading throughout China’s property sector, particularly in the offshore bond market. Investors are focused on China’s objectives in controlling speculation in the property sector—are Chinese leaders still committed to maintaining economic growth, or have political priorities changed? But the next steps in the crisis will be determined by China’s methods in communicating with homebuyers, investors, and financial markets—the means rather than the ends. The critical question is whether or not China’s politics are constraining conventional economic policy-making, and preventing a counter-cyclical policy response that had successfully managed similar episodes of financial stress in the past. Markets are now anxiously awaiting the answer.

Posted October 14, 2021
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China’s Property Bailouts: Quiet or Loud?

In the absence of a declared bailout or workout for Evergrande, contagion is spreading throughout China’s property sector. With Fantasia missing bond payments on Monday, and Evergrande’s sales declining and asset disposals accelerating, questions now focus on the steps Chinese authorities will take to save other property developers or minimize the fallout from defaults on the broader economy. Beijing must act, but the question remains how Chinese authorities will do so.

Quiet bailouts and restructurings are probably the preferred policy tools, but they may fail to contain contagion to the rest of the property sector. Announcing clear workout and restructuring plans can help to restore confidence in the rest of the property market, but risks backfiring if policy support is viewed as insufficient, or a sudden reversal of previous messages. Risks are clearly tilting in the direction of Beijing acting quietly, and late, extending the slump in China’s property market.

Posted October 9, 2021
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