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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