China Carry trades carry capital outflow

07 March, AtoZForex, London – Late heavy capital outflows from the Chinese financial market have been mainly due to the unwinding of China carry trades, the Bank of International Settlements (BIS) noted on Sunday.

The study in the regular quarterly report by the central banks also indicated that capital flight from the CNY had tended to be about the repayment of USD-denominated debt by Chinese companies instead of widespread mainland asset sales.

This might point to a reduction of the pressure that has forced China to use billions of its massive FX reserves to fend off deeper devaluation of the CNY.

The Bank of International Settlements data showed that companies and rich Chinese individuals exchanged the Yuan savings held in offshore locations like Hong Kong or Singapore for the US Dollars as they lost faith in the Chinese economy.

China Carry trades

Of $175 billion in cross-border currency flows out of China in the Q3, $40 billion was due to the reductions in offshore deposits. Meanwhile, Banks in those jurisdictions responded by drawing down deposits with mainland banks, resulting in total capital outflow of $80 billion.

With a further $41 billion in aggregate repayment of foreign currency debts by Chinese companies, total flowing out capital in these three forms amounts to $121 billion, BIS said.

“The combination of reduced offshore renminbi deposits and Chinese firms’ paydown of foreign currency debt reflects the unwinding of carry trades and explains the downward pressure on China’s currency,” said Hyun Song Shin, BIS Economic Adviser and Head of Research.

“It also shows why the offshore renminbi rate trades at a discount to the onshore rate during periods of stress,” he added.

However, the Q4 2015 and start of 2016 numbers are likely to prove more important for the investors who have bet against the CNY since a surprise devaluation last summer.

People’s Bank of China (PBoC) reserves have been declining by about $100 billion a month since November.

BIS said that Hong Kong Monetary Authority data on cross-border claims on Chinese non-bank businesses indicated an acceleration of net outflows in October and November and a faster contraction in onshore net foreign currency loans, by $29 billion.

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