China expected to see $538 billion capital exodus in 2016, IIF says

Mon Apr 25, 2016 12:12pm EDT
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By Marc Jones

LONDON (Reuters) - Global investors are expected to pull $538 billion out of China's slowing economy in 2016, the Institute of International Finance (IIF) estimated on Monday, although the pace of outflows has dropped.

That number would be down a fifth from the $674 billion pulled out last year, the industry association said, but could accelerate again if fears re-emerge of a "disorderly" drop in the yuan, or the renminbi, as the currency is also known.

Capital exodus from China can influence emerging markets more generally, partly because of its sheer size and partly because sustained outflows can trigger more exchange rate volatility, which could then feed a fresh wave of outflows.

"A sharp drop in the renminbi would likely spark a renewed sell-off of global risk assets and trigger a flight of portfolio capital from emerging markets," the IIF said in a new report.

"Moreover, a sharp depreciation of the renminbi could lead to a round of competitive devaluation in other emerging markets, particularly in those with close trade linkages to China."

For now, though, outflows are slowing. Roughly $35 billion was pulled out in March, bringing the total since the start of the year to around $175 billion, well below the pace seen in the second half of 2015.

The IIF cited progress Chinese authorities had made in easing worries about the yuan's direction. They have emphasized there is more focus on its value against a basket of currencies, rather than just the U.S. dollar.

One "important unknown", however, is the threshold of currency reserves below which Chinese authorities would start to worry. They might then either allow the yuan to fall again or markedly tighten capital controls.   Continued...

Investors check stock information at a brokerage house in Nantong, Jiangsu Province, China, April 20, 2016. China Daily/via