Capital Controls Take a Small Bite

China’s State Administration of Foreign Exchange just released preliminary balance of payment (BOP) data for 4Q 2016. This note reviews the latest data points and discusses market- and policy-relevant trends. The key takeaways are:

China continues to face persistent capital outflows, and weaker current account inflows: The 4Q 2016 BOP data show a current account surplus of $37.6 billion and a capital and financial account deficit of $187.2 billion, with a corresponding drop in foreign exchange reserves by $149.5 billion for the quarter. For 2016, SAFE reported a drop of $443.6 billion in FX reserves, larger than the official drop of $319.8 billion. The level of FX reserves has now fallen below $3 trillion in the January 2017 data and has precipitated sufficient concern for regulators to intensify capital controls on outbound direct investments and cross-border RMB payments.

Reversal of FDI balance to surplus shows reporting seasonality and impact of capital controls: The FDI balance swung back to a surplus for the first time in a year in 4Q16, with $17.2 billion in net inflows. This can be attributed to a seasonal uptick in reported FDI inflows and a decline in outbound investment, which seems at least partially due to the tightening of administrative controls.

BOP outflows are driven by residents: Breaking down capital and financial account transactions between Chinese residents and non-residents shows Chinese residents are responsible for most outflows, with diversification of savings into foreign assets and outbound investments as the primary driver. Recent measures seem to be successful in slowing down certain types of outflows, but they are in direct conflict with the goal of bolstering the necessary balancing inflow of foreign capital.

Posted August 1, 2017
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