China: The surge in capital flows may be just beginning
Details and the full research briefing are below (PDF format). Media may reproduce our charts with attribution to Oxford Economics.
Key points:
• China’s capital in- and outflows have risen strongly since early 2020, following the easing of policy restrictions both ways. However, China’s integration into the global financial system has only just begun, and the potential for capital flows to expand further is large, especially for portfolio flows.
• Rising capital inflows have largely been in the form of foreign direct investment (FDI) and portfolio flows. Foreign interest in Chinese assets has recently risen markedly, with foreign investors’ equity and bond holdings boosted by the country’s robust economic growth and relatively high interest rates.
• The strong inflows, in turn, have led policymakers to ease their stance regarding capital outflows. In this context, capital outflows also surged in 2020, to a record US$213 billion in Q3, and a further rise in Q4 is likely.
• With outflows exceeding inflows, net financial outflows amounted to US$83
billion in Q3 and US$106 billion in Q4. The sizeable net outflows are the reason reserves rose only modestly in 2020, despite a substantial current account surplus – US$299 billion in 2020, or 2% of GDP.
Click here for the full research briefing
“While China’s cross-border financial holdings as a share of GDP are comparable to those in other large middle-income emerging markets, they’re low compared to developed economies, underscoring the potential for them to expand further in coming years, with Hong Kong likely to continue to play an important role.” – Louis Kuijs, Head of Asian Economics
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