World Economy

China saw record capital outflows in November, Capital Economics says

Neelabh Chaturvedi
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The constant stream of capital outflows from China that have bedeviled global financial markets likely reached a record in November, according to estimates from Capital Economics.

Julian Evans-Pritchard, China economist at the Singapore office of Capital Economics, has estimated that net capital outflows totaled $113 billion last month, accelerating from $37 billion in October.

But getting an accurate picture of how much money is actually fleeing China is somewhat tricky.

Data released Monday showed China's foreign exchange reserves fell by $87.2 billion in November to $3.44 trillion. Evans-Pritchard's calculations suggest that fluctuations in exchange rates accounted for $30 billion of that reduction, leaving $57 billion in foreign exchange sales by the central bank.

Combining the foreign exchange sales with Capital Economics' trade surplus estimate of around $55 billion for November (official data are out Tuesday) leaves net capital outflows at $113 billion.

Investors to focus on China, Japan, Australia data

It is worth noting that these estimates can vary. Capital Economics reckons that net capital outflows stood at $86.3 billion in August, the month when China rocked financial markets by devaluing the yuan. In contrast, the U.S. Treasury believes capital outflows were closer to $200 billion during the month.

Despite the differences, observers note that the outflows reflect expectations for the yuan to weaken further as China's economy slows. Yuan traded offshore is currently at its weakest level against the more tightly controlled onshore counterpart, suggesting traders expect further declines.

"A rise in offshore interest rates due to the increased likelihood of a December Fed rate hike will also have added to outflow pressures," said Evans-Pritchard.

The IMF, the SDR and the yuan explained

The inclusion of the yuan as a reserve currency in the International Monetary Fund's (IMF) Special Drawing Rights basket last week represented a nod from the IMF that Beijing's reforms were moving in the right direction.

But a disappointing result from the official manufacturing Purchasing Managers Index (PMI), a measure of factory activity, for November sent investor confidence tumbling once again.

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