China capital exodus reaches record speed on tariff threat

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China capital exodus reaches record speed on tariff threat

general :: 2024-12-17 :: source - bloomberg

By Bloomberg News

(Bloomberg) — China suffered the biggest outflow on record from its financial markets last month as the prospect of higher US tariffs posed more risks for the world’s second-largest economy.

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Domestic banks wired a net $45.7 billion of funds overseas on behalf of their clients for securities investment, according to data released by the State Administration of Foreign Exchange on Monday. That amount accounts for foreign investment in China as well as local residents’ purchases of overseas securities.

The rising tide of outflows signals souring sentiment toward the Asian nation as US President-elect Donald Trump’s vow to impose 60% tariffs on Chinese goods threatens to decimate trade between the two nations. Weakness in the yuan and local stocks, as well as the nation’s wide interest-rate gap with the US, are raising the risk of a vicious cycle of capital outflows.

“US tariff threats and interest rate differential factors are expected to fuel outflow pressure from China,” said Ken Cheung, chief Asia FX strategist at Mizuho Bank. “The dollar yield advantage is expected to keep the Asian currencies under pressure broadly,” he said.

Chinese stocks have lost their upside momentum since October, as stimulus measures announced by authorities lagged market expectations. The nation’s benchmark sovereign bonds now yield less than a half of what Treasuries offer. The onshore yuan also is hovering near a one-year low, while a gauge of the dollar is close to its highest level since 2022.

Given these challenges, China may keep striving to revive growth momentum and turn sentiment around for capital to flow back into local assets with low valuations, Cheung said.

In a key policy meeting last week, China’s top leaders signaled more public borrowing and spending in 2025 and a shift of policy focus to consumption, in an effort to boost the economy. President Xi Jinping’s decision-making Politburo vowed to embrace a “moderately loose” monetary policy in 2025, signaling more interest rate cuts ahead.

Official Chinabond data also showed foreign institutions cut holdings of Chinese government bonds to 2.08 trillion yuan ($285.5 billion) as of last month to the lowest since September 2023. Mainland Chinese investors bought a net HK$125 billion ($16 billion) of Hong Kong-listed securities in November, the highest in more than three years, according to Bloomberg data.

—With assistance from Charlotte Yang and Qizi Sun.