Nexus Linking Capital Outflows, Weaker Yuan Belief Poses Risk, Economist Says

Yicai

2016-12-09

(Yicai Global) Dec. 9 -- Effective measure should be taken to reduce the risk of mutual reinforcement between capital outflows and expectation of further yuan devaluation, according to a well-known Chinese economist.

China will continue to face pressure from capital exiting the country and a weakening currency, said Lian Ping, chief economist at Bank of Communications Ltd. and professor of finance at Shanghai Academy of Social Sciences.

Lian pointed out that China has become a net exporter of direct investment from a net importer, and the pace has accelerated. The attractiveness of China's manufacturing industry to capital will continue to decline in the future, while foreign direct investment will see rapid growth.

Amid slowing economic growth, return on investment is cooling in China. Coupled with higher production costs, the demand for global asset allocations, hedging and arbitrage are on the up among companies and individuals. In the medium to long term, there will be a continuing demand for further outflows in the residential sector, said Lian.

Strong expectation of a softer yuan may further stimulate hedging and arbitrage, bringing capital outflow and yuan depreciation pressures to bear, Lian said. Excessive currency issuance has brought pressure to bear on the currency, though this is not the main and direct cause, he said. Lian predicted that the yuan-dollar spread may narrow further or remain at a low level, or even disappear, which will bear down on the yuan.