For the first time since China’s open door policy, the first quarter of 2016, Chinese corporates’ direct investment abroad surpassed foreigners’ direct investment in China, according to Natixis Research.
Last summer, China’s stock market collapse and unexpected devaluation, deepened China’s capital outflow problem and accelerated the fall of reserves, which had started in mid-2014, according to Natixis. Reserves have started to stabilize since February, and the onshore-offshore RMB spread has narrowed.
While capital outflows are still large it is not enough for reserves to start falling again. In 2015, the largest net outflows were stemming from the repayment of bank loans, followed by unrecorded outflows by residents of close to 200USDbn (classified as a residual of the financial account in net errors and omissions).
Portfolio flows (equity and bond) were also negative but smaller. The situation has hardly improved in 2016 based on the first quarter data. In fact, all types of capital recorded outflows, even net foreign direct investment (FDI), which was not the case in 2015.
Residents driving capital outflow
Chinese residents have been driving capital outflows for years. The difference in 2015 is that non-residents stopped investing in China and started to move their capital out. Still, the bulk of the outflow was made by residents.
Currency and deposits were the bulk of the outflows (other investment) while repayment of bank loans as well as Chinese banks’ loans to overseas companies have become more important during the first quarter of 2016. Portfolio investment has turned negative for both residents and non-residents.
FDI net flows have been positive until Q1 2016 and, even now, the net outflow – as recorded in the balance of payments – is very moderate.
“This might sound strange given the large M&A operations by Chinese corporates announced since the beginning of 2016 but it is not contradictory as a good part of those deals may have been financed outside China (leveraged buyouts financed in the offshore market).
“Finally, some of the corporates closer to the State, China Investment Corporation (CIC) being the best example, seems to have reduced the share of foreign assets as opposed to domestic assets, thereby reducing capital outflows from its purchases. More generally, M&A engagement is one thing, bringing foreign reserves out of China is another,” explains Natixis Research.