Soaring dollar tests China’s capital controls as cash flees

HONG KONG, Oct 17 (Reuters) – Cash is leaving China’s financial markets at the fastest rate in years as investors flee a weaker currency and a sluggish economy, and analysts are pointing to hints that more Money is transferred out of the country through secondary channels in a further sign of waning confidence.

The flows, mainly from the bond market, reflect the allure of higher interest rates elsewhere.

But their size and the signs that they are extending beyond the wallets of foreigners highlight the fragility of domestic confidence – a potential drag on the yuan in the future – and the magnetic effect of the rising dollar. US on global capital flows.

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“Everyone is suffering from the storm of US interest rate hikes,” said wealth manager Liu Yuan. “US dollar assets are in the eye of the storm. It’s a haven of breeze and sunshine (while) life is tough on the outskirts.”

Officially, China’s national financial accounts, which cover stock and bond markets and direct investment flows, show that a net amount of $101 billion was withdrawn in the six months to June, putting 2022 on track to record the largest such annual releases since 2016.

Monthly debt market data shows foreign investors were net sellers for seven consecutive months through August as what had been a lucrative yield premium in China disappeared as U.S. interest rates were skyrocketing.

Granted, exports mean that China’s current account balance is still positive and not all asset classes are seeing outflows – with stocks actually attracting modest inflows.

But a large net outflow of $45.2 billion in the balance of payments under the “errors and omissions” category, has some economists suspecting the money is being moved out of the country through illegal or semi-legal channels.

“The errors and omissions essentially reflect residents’ money flowing out unofficially,” said Alicia García Herrero, chief Asia economist at French bank Natixis.

“It’s not just foreign asset managers who are no longer investing in China, it’s unrecorded outflows that are getting worse,” she said as confidence wavered. “People want to get their money out.”

The yuan has depreciated more than 11% against the dollar this year.

Unlike most of its global peers which are rapidly tightening policy to rein in runaway inflation, China is cutting lending rates to support its steeply slowing economy. The housing market, where most Chinese have their biggest assets, is in steep decline and youth unemployment has reached record highs.

GIVE ME SHELTER

Amid the exodus of foreign investors, there are signs that locals are following as fast as they can under capital controls that were tightened after the previous season of strong outflows in 2016.

Outbound investment under the cross-border Bond Connect, which connects mainland China with Hong Kong and global markets, totaled 301.5 billion yuan ($42 billion) at the end of August, up 34% from the month. previous and 19 times since March.

“All types of assets are down this year except for a few money-type products pegged to the U.S. dollar,” said Liu Yaolong, chief marketing officer at GaoTeng Global Asset Management, which promotes these funds. to Chinese investors.

Quota-based systems allowing local investors to access foreign markets and products are also increasingly popular.

Subscriptions to the Qualified Domestic Institutional Investor (QDII) program rose 80% in the eight months to August to 322.8 billion fund units.

A survey recently published by HSBC also showed that 85% of investors who have money in foreign products through a cross-border Wealth Management Connect Scheme, plan to invest more over the next 12 months.

RETURN CHANNELS

Signs of unrecorded flows are more difficult to detect and “errors and omissions” data in national accounts are inconclusive. It’s also very difficult to move money, as COVID-19 travel restrictions add an extra layer of capital controls.

Still, migration can provide an excuse to transfer money, and brokers have noticed an increase in education inquiries.

Data from consultancy Education International Cooperation showed a 41.5% increase in inquiries about studying in Hong Kong between January and July, compared to the same period a year earlier.

Family offices abroad can also become global investment centers. About 300 new family offices opened in Singapore last year, according to the Monetary Authority of Singapore.

Investors from Hong Kong, Macao and Guangdong province accounted for 44% of newly established family offices in Singapore in the first four months of this year, compared to 39% for all of 2021, according to Chinese newspaper Lianhe Zaobao. in Singapore.

Purchasing insurance products in Macau, where the border with the mainland remains open, has been another popular secondary channel that is anecdotally attracting renewed interest. Products purchased by mainland visitors are typically denominated in US dollars, providing a hedge against a weak yuan, and offering an attractive long-term yield.

Agents involved say the continued lockdowns and uncertainty in China’s property market are also factors other than the weakening currency. If they persist, the opening of Chinese borders could trigger new flows and currency sales.

“I won’t say that the renminbi’s depreciation is the only trigger,” said an agent for insurer AIA, who requested anonymity because the subject is sensitive. They expect a rush for Hong Kong products when the border between Hong Kong and the mainland reopens.

($1 = 7.1741 Chinese yuan renminbi)

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Reporting by Shanghai Newsroom and Georgina Lee and Summer Zhen in Hong Kong; Writing and additional reporting by Tom Westbrook; Editing by Kim Coghill

Our standards: The Thomson Reuters Trust Principles.

James V. Hayes