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China’s exodus of capital is numbers game where scepticism rules

Is it US$19 billion, US$28 billion or US$50 billion – what is the actual size of China’s exodus of funds?

The central bank publishes three monthly indicators that gauge the size of funds leaving the country – the official foreign exchange reserves, the central bank’s yuan positions accumulated from foreign exchange purchases, and transaction balances between commercial banks and their clients.

Although the three indicators do not cover the same thing, and are not always consistent, in September they indicated that capital was leaving not only in greater amounts, but at an accelerated rate. However, widening divergence among the numbers left many analysts scratching their heads over how much had actually had left the country.

It is a matter of great interest to analysts and speculators because the outside world often has to rely on the limited availability of the data to judge not only the extent of China’s capital outflow but also how committed the People’s Bank of China (PBOC) is to intervening in the foreign exchange markets to defend the yuan.

Data released on October 7 showed that the country’s foreign exchange reserves shrank by US$18.8 billion in September, but the central bank said two weeks later that it sold a net 337.5 billion yuan (HK$386.5 billion) worth of foreign exchange, or roughly US$50 billion.

The latest data from the ­foreign exchange administration shows Chinese investors bought a net 189.7 billion yuan worth of ­foreign exchange, or about US$28 billion, further blurring the ­picture.

“The PBOC and Beijing are using other tricks or pools of money to buy the yuan without using official foreign reserves,” said Christopher Balding, an associate professor at Peking University’s HSBC Business School. “They are using other pools of capital to soak up the downward pressure on the yuan as it leaves China.”

PBOC sets yuan fixing at six-year low amid renewed depreciation pressure

The central bank and the State Administration of Foreign Exchange said that capital outflow from the country was under control and that foreign currency was in high demand from Chinese outbound tourists ahead of the week-long National Day holiday.

Ruan Jianhong, the head of the PBOC’s statistics department, said valuation changes in the country’s US$3.17 trillion reserve assets, caused by a stronger US dollar, could partly explain the inconsistency between the indicators. The PBOC did not publish detailed breakdowns of China’s reserves so it was hard to verify the claims.

But economists said the real situation could be much more complicated than the official comments suggested. “Our guess is that the real drop of the foreign exchange reserve is larger than US$18.8 billion,” said Xie Yaxuan, head of research at China Merchants Securities in Shenzhen who has previously worked as a foreign exchange official.

PBOC sticks to prudent policies to keep the yuan stable

Xie said discrepancies between the foreign exchange reserve changes and the yuan positions “became particularly significant in August and September” and “it is a problem of perplexity to understand the divergence of indicators” due to the lack of data from the PBOC

The yuan is under pressure to weaken further against the dollar, and hit new six-year lows one after another this month.

“The growing pressure from the outflow will continue … and the PBOC data in September may have

indicated that the previous months’ data on capital outflows were underestimated,” said Ding Shuang, a Hong Kong-based economist at Standard Chartered.