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Curbs On Capital Leakage Shows China Is Serious At Reducing Debt Habit

Tom Burroughes, Group Editor , 12 September 2017

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China continues to be serious about reducing the amount of debt leverage in its economy - a potential big weakness - as certain evidence indicates, the German banking group states.

Recent Chinese efforts to curb capital outflows and protect its renminbi currency, which appear to have borne fruit, highlight how the Asian giant is seeking to cut the domestic economy’s reliance on debt, seen as a potential fault-line, wealth managers say.

The dollar fetched 6.96 renminbi at the start of 2017 but has since declined to 6.47. During 2016, the dollar had steadily advanced against the renminbi, aka the yuan, amid concerns about capital leakage out of China.

“Chinese overseas direct investment already exceeds foreign direct investment into China and there are worries that a declining value of inwards FDI could have a very broad impact, not only on immediate levels of economic activity, but also on the import of technology necessary to upgrade China’s industrial base,” Tuan Huynh, chief investment officer and head of wealth discretionary for APAC, Deutsche Bank Wealth Management, said in a note.

“The desire to limit outwards foreign investment stems from rather different reasons: there are concerns that too much of this is being financed through debt and that capital outflows are making it more difficult to manage domestic levels of liquidity. Falling outwards investment this year does seem to have given the People’s Bank of China slightly more leeway to pursue its monetary policy objectives so far this year, engineering both a rise in reserves and a strengthening currency,” he said. 

The country continues to make efforts to attract capital inflows, such as by making it easier to invest in certain sectors, giving selective tax breaks to foreign investors and reducing rules about the repatriation of foreign profits. However, as previously reported by this publication, China is also trying to reduce capital outflows, putting outward foreign direct investment (FDI) into three categories: encouraged, restricted and banned.

Meanwhile, the renminbi continues to appreciate against the dollar; China’s central bank has raised its official mid-point guidance rate for the ninth successive trading session. The currency has now appreciated by 6.5 per cent against the dollar this year, while foreign reserves have also risen recently, gaining $11 billion in August to reach $3.09 trillion. 

Separately, a note from National Australia Bank highlighted how China has attempted to restrain renminbi appreciation against the dollar. “The People’s Bank of China has confirmed that it is removing the 20 per cent reserve requirement for FI [foreign institutions] buying USD/CNY forwards. This had been effective October 2015 as pressure was mounting on the CNY after the PBoC's change in the USD/CNY fixing mechanism.”

NAB added that China is moving towards a more liberal foreign exchange rate policy in the medium term.

The comments echo recent detailed comments on China's macro-economic stance from Northern Trust, the US bank. (See here.)

 

 

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