While an overseas buying spree by Chinese companies has grabbed headlines, more mundane activity such as trade finance and corporate cash management are a much bigger strain on China’s foreign exchange reserves, analysis of official data shows.
The dominance of bank lending and portfolio investment as a source of Chinese capital outflows casts doubt on whether Beijing’s recent clampdown on big-ticket foreign deals by the likes of Dalian Wanda and Anbang Insurance can shield the renminbi from downward pressure, intensified by the US Federal Reserve’s interest rate rise on Thursday.
Bank lending and securities investment accounted for $301bn in net outflows from China in the first nine months of the year, compared with $78bn from outbound foreign direct investment, according to Financial Times analysis of balance-of-payments data.
Beyond loan repayments and securities sales, illicit flows are also increasingly prominent. “Errors and omissions” — a catch-all for cross-border transfers that have not been properly classified — caused net outflows of $89bn in the first half of 2016, which is also nearly double the $46bn net FDI outflows in the same period. Errors and omissions are not yet available for the third quarter.
China has taken substantial steps since 2012 to liberalise cross-border money flows as it sought to internationalise its currency and pursued the International Monetary Fund’s endorsement as a reserve currency. Those steps have opened the door to unprecedented capital outflow pressure as hot money now leaves through the same deregulated channels through which it entered.
“Several hundred billion in outflows are simply associated with repayment of existing loans,” said Brad Setser, a senior fellow at the Council on Foreign Relations and former US Treasury official.
Foreign bank claims on China, a broad measure of cross-border lending, have fallen by $305bn in the 18 months through June this year, according to the most recent figures from Bank for International Settlements, showing how banks are pulling funds from the country. Claims had risen by $643bn in the previous two years.
Much of this lending came in the form of trade finance. When the renminbi was appreciating against the dollar, Chinese importers eagerly borrowed in dollars. Such borrowing was effectively a bet on the Chinese currency appreciating because in renminbi terms, dollar debt was cheaper to pay back by the time the loan matured. Now outflows are occuring as importers repay foreign loans and shift to local financing.
Savvy cash management by corporate treasurers seeking to maximise returns on idle cash likewise fuelled inflows. In addition to gains from renminbi appreciation, corporations could profit from higher interest rates available in renminbi at a time when the Federal Reserve was holding dollar rates near zero.
“Corporates rushed to raise funding in dollars because interest rates were very low. Now that carry trade is being unwound,” said Harrison Hu, China economist at Royal Bank of Scotland in Singapore.
To be sure, the regulatory focus on corporate deals is a response to a rapid acceleration of outbound FDI. But it also reflects the lower disruption from tightening the reins on foreign acquisitions compared with forcing loan or bond defaults by blocking cross-border debt repayments.
Even so, some bankers and analysts now worry that even debt payments will eventually feel the impact of the recent clampdown on outflows.
“The cross-border regulations could definitely have an impact on companies that have offshore debt,” said Xia Le, chief Asia economist at BBVA in Hong Kong. “There is a concern that many will have to refinance but at a much higher cost. They will need to issue very high-yielding bonds.”