Assessing China’s recent capital outflows: policy challenges and implications

Abstract

China has experienced a dramatic swing from net capital inflows to large net outflows in recent years. Using balance of payments data, an analysis of the underlying factors that drove China's recent capital outflows since mid-2014 were (1) corporates adjusting their balance sheets to reduce foreign exchange exposure or to unwind "carry trade"; (2) Chinese corporate and households seeking to diversify assets offshore; (3) Renminbi internationalization push, which facilitated capital outflows and capital flight by encouraging outbound investment; and (4) higher US interest rates and strengthening US dollar all likely further amplified the above factors. The capital exodus to some extent reflects policy difficulties that China's authorities face in managing economic reforms. In particular, China faces tough challenges in balancing the benefit/risk trade-off from capital account opening and attempting to introduce more flexibility to the currency. To stabilize capital flows and currency expectations, clarity and transparency in communicating policy objectives are essential while the implementation of structural and institutional reforms to correct economic imbalances (such as overcapacity and debt) and improve macroeconomic fundamentals are imperative and particularly pressing.

Fleeing from systemic risk at home through cross-border acquisitions

“…As an exception, Voss et al (2010) find that China’s inefficient banking system has pushed disadvantaged smaller firms to invest abroad when seeking to obtain external funding. Only recently, the literature began positing that Chinese OFDI could be a way to escape from unfavorable domestic conditions (Buckley et al , 2018; Chan, 2017; Cheung et al , 2016; Gunter, 2017). Buckley et al (2018) identified this topic as a critical area for future research and emphasized that “the use of FDI as a cover for capital flight is growing” (p8), e.g.…”

“…As a new risk measure that has increasingly drawn scholarly attention since the 2008 financial crisis, systemic risk represents the extreme downside risk associated with economic collapse (Kaufman and Scott, 2003; Schwarcz, 2008; Acharya et al , 2017; Zhou et al , 2020). It excludes upside volatility and, as such, is more appropriate risk measure than systematic or idiosyncratic risk for assessing the role of risk in international diversification (Buckley et al , 2018; Chan, 2017; Cheung et al , 2016; Gunter, 2017). The measure of systemic risk used in our analysis calculates the expected decrease in an industry’s value when the stock market index falls into the left 5% tail and thus shows an industry’s risk due to extreme market collapse, while the traditional measures of risk, systematic risk and idiosyncratic risk, measure only an industry’s overall volatility due to market and firm-specific risk sources respectively.…”

China's outward foreign direct investment in Southeast Asia: Analyzing the Chinese state's strategies and potential influence

“…After relocating labor-intensive manufacturing production to other countries, the services, such as shipping, insurance, wholesale facilities, and after-sales services, became important OFDI that supported Chinese manufacturing firms' production and sales in host countries (Xu, 2011). Concerns about a weaker RMB coupled with a slower rate of return on domestic investment have led to the repatriation of OFDI profits as well (Chan, 2017). The overseas investment helped to diversify Chinese firms' markets and improve their financial position (Tan, 2013).…”

Research on the Impact of Fed Rate Hike on China's Macro-economy

“…The potential short-term cross borders capital outflow could be tempered by the capital control policy of China. A lot of literature explores the effectiveness of China's capital control [15][16][17]. A model, known as "the Mundell-Fleming trilemma", describes why capital control plays an important role in regulating exchange rates while keeping the independent monetary policy.…”