The flow of speculative capital into China may be drying up, or even starting to reverse course, but analysts on Friday said the evidence was unclear and there was no cause for concern yet. China's official foreign exchange reserves, the world's largest, grew by $21.4 billion in September to $1.9056 trillion, according to official data published this week.
That may bave been a big gain but it was $14.5 billion below the combined inflows that month from the trade surplus and foreign direct investment. The discrepancy between the rise in reserves and the trade and investment total is often used as a rough gauge whether a country has experienced capital inflows or outflows. In this case, the shortfall in reserves pointed, in theory, to a small exodus.
But as official data do not disclose the composition of China's reserves, nor transaction gains or losses, interpreting the figures is guesswork. "China's attractiveness is diminishing as its stock and property markets keep sagging and the pace of yuan appreciation slows down," said Gene Ma, an economist at China Economic Monitor.
Zhang Ming, a senior analyst at the Chinese Academy of Social Sciences, a key government think-tank, told the China Securities Journal that Western financial institutions were withdrawing from emerging markets to meet capital needs at home because of the credit crisis.
But other economists questioned whether money was truly fleeing China. "We do not think the available evidence is strong enough to suggest capital outflow," Wang Tao, an economist at UBS Securities, said in a client note. Wang said capital inflows had slowed in recent months, but the small reserve accumulation in September probably reflected other factors, especially the implementation of new foreign exchange management regulations.
The conversion of the prepayment of export proceeds into yuan was restricted under the new rules, published in July, reducing dollar sales by banks to the People's Bank of China. Wang also said the small reserve increase could have reflected investment losses due to the global financial turmoil.
Chen Daofu, a senior researcher at the Development Research Centre, a key cabinet think-tank, said the simple fact was that less money was entering China. Chinese companies were raising less cash abroad and foreign private equity firms were also staying away, he told the China Securities Journal.
For its part, China's State Administration of Foreign Exchange said in a statement on Thursday that it would closely monitor cross-border capital flows to safeguard the country's financial health, though it gave no details. Whether capital is leaving China or just flowing in more slowly, analysts all agreed that the risk to China's economy and currency was minimal.
"A slower increase in reserves is not bad news for China, and it will not put extra pressure on the yuan as China has a large amount of reserves," Ma said. Zhang even forecast that hot money would start rushing into China again next year when global markets stabilise and emerging market economies stand out again for their fast growth.