Inflows and a Recovering World

The debate over the short-term path of China’s currency concerns a tug-of-war between strong fundamental inflows and a global environment becoming less favorable for capital flows to emerging markets, and China in particular. A few conclusions from the Q4 2020 balance of payments details:

• Inflows will likely carry the day over the next few months as goods trade surpluses stay high. Travel from China remains limited, reducing the services trade deficit, and keeping the RMB under pressure to appreciate.
• However, the medium-term diversification of China’s household and corporate savings driving RMB depreciation is a powerful force, and domestic debt pressures should drive China’s interest rates lower, reducing inflows.
• The data on banks’ external lending is increasingly contradictory. Q4 2020 details show both banks increasing their outbound lending, and corporates repaying foreign loans in volumes similar to the period of RMB depreciation in 2015-2016. In an environment of expected RMB appreciation, both phenomena are unusual, particularly when China’s overall foreign debt increased in the last two quarters.