Outflows Controlled, Inflows Elusive

China’s Q3 balance of payments details point to a calmer period in exchange rate management for the PBOC despite the persistence of trade tensions, pressures on China’s exports and a lower current account surplus. Key findings include:

Capital outflows are softer than in the previous round of yuan depreciation. Despite the yuan’s weakness late in 2018, outflows are far milder than in late 2015 and 2016, as there is scant evidence of banks and corporates repaying external liabilities in size.

The current account balance continues deteriorating, but will remain in surplus for 2018. Record quarterly services trade deficits continue to pressure the current account balance, but the full-year current account deficit narrowed in Q3, and will probably return to surplus in Q4 as imports soften.

Capital inflows remain elusive. Bond inflows have reversed along with the PBOC’s renewed defense of the yuan, and foreign direct investment inflows dropped considerably in Q3. This leaves China without a sustainable source of long-term capital inflows, even though the pressure from capital outflows is mild.

Posted January 23, 2019
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