The True Picture of Capital Outflows

Since the second half of 2014,a number of emerging market economies have seen sizable capital outflows coupled with currency depreciation. This trend has been due to an appreciating dollar,an economic downturn in emerging markets and the effects of the global economic and financial environment. In China's case,there have been a number of differing interpretations of the outflows of capital. This article will seek to examine the main sources of capital outflows by examining the capital and financial account in the 2015 balance of payments,the decline in the nation's foreign exchange reserves,the protracted deficit from bank foreign exchange settlements and sales on behalf of customers and foreign-related receipts and payments.

Overview of China's Capital Flows in 2015

China's international balance of payments data show that net capital outflows under the nation's non-reserve financial accounts reached $185.6 billion in 2015,up sharply from $51.4 billion in 2014. In 2015,large-scale capital outflows mainly came from the active accumulation of foreign assets and the repayment of foreign debt by domestic enterprises and individuals,rather than the sale of renminbi assets by foreign investors. In the Bank for International Settlement's report for the September quarter in 2015,the bank pointed out that "China's recent capital outflows were largely due to the continuous contraction of the offshore market for renminbi deposits and the active repayment of foreign currency debt by Chinese enterprises."

Structural Analysis of China's Cross-border Capital Flows in 2015

China's increase in foreign assets holdings has translated into a capital outflow of $392 billion,according to data from the State Administration of Foreign Exchange. That tally was composed of an increase of $187.8 billion in outbound direct investment,while portfolio investment rose $73.2 billion,and deposits,loans and other investments saw an increase of $127.6 billion. With the continuous promotion of our country's "One Belt,One Road" offshore development strategy,domestic enterprises have become increasingly optimistic about the prospects of investing abroad,and this has been reflected in the rapid growth of China's outbound investments. The nation's foreign asset holdings maintained an average annual growth of 60% in 2014 and 2015,and this pace has exceeded that of other investments offshore,becoming the largest source of foreign assets and accounting for nearly half of the total growth.

As for China's repayment of foreign debts,this has led to a capital outflow of $351.5 billion. Repayment of foreign loans and trade finance liabilities accounted for $229 billion,while deposits of non-residents in China saw a decrease of $122.6 billion -- also key factors in capital outflows. Under the combined effects of a narrowing of spreads between domestic and foreign interest rates as a result of increased US interest rates,growing expectations of renminbi depreciation,and weaker foreign trade,domestic enterprises actively adjusted the structure of their foreign assets and liabilities. They reduced foreign borrowings and accelerated repayments,with trade financing showing a particularly sharp impact. Among other things,this shows greater risk awareness and that domestic companies were taking the initiative in trimming their external debt burdens. In 2015,acceptances of foreign letters of credit through the banking system (mainly for companies paying for imports) declined by $89.8 billion,while trade credit liabilities fell $62.3 billion and overseas borrowings were down $30.2 billion.

Inbound foreign direct investments and portfolio investments have partially offset the pressure from cross-border capital outflows. China had a net inflow of $249.9 billion from inbound investments from abroad in 2015. Although that was down 7% from the previous year,the net inflows were still relatively large. China's 6.9% economic growth last year was slower than in recent years but it was enough to make the nation one of the world's better performing economies. In addition,China maintained a large current account surplus and foreign investors generally remained very optimistic about long-term investment prospects in China,as can be seen from the steady net inflow of foreign direct investments,including a 4% rise in equity investments. Portfolio investments to China showed a net inflow of $6.7 billion.

The Qualified Foreign Institutional Investor (QFII) and Renminbi Qualified Foreign Institut