China's exports market remains healthy, but trade tensions lead to capital outflows

Institute of International Finance says investors expect China's currency will weaken as tariffs are imposed

Capital outflows from China are rising on fears of a weakening yuan, a new report by IIF says. AFP 

Capital outflows from China are rising on concerns of a weakening yuan and at a faster pace than in 2012 during an corruption crack-down, according to a new report from the Institute of International Finance (IIF).

“It is possible that US tariffs, which should exert depreciation pressure on the RMB [yuan], are gradually causing expectations to build that the RMB will weaken, which could be generating these outflows. We see this as an important issue for China policymakers and EM [emerging market] investors,” the IIF said.

China's current account surplus, however, is at its highest in four years.

“Ongoing US-China trade tensions should be exerting strains on China’s balance of payments. This should be most obvious on the current account and trade side, where exports should be weakening. However, the current account surplus is on a rising trajectory, partly due to exports that still look quite healthy and somewhat lower imports,” the report said.

The Washington-based institute put China’s current account surplus at $212 billion (Dh778.57bn) this year, the highest since 2015.

The US and China, the world’s two largest economies, are engaged in a trade war, levying tariffs on each other’s goods, which is impacting growth in both countries and raising fears of a global recession.

The US increased tariffs on $250bn of Chinese goods in May, while Beijing responded with additional levies on nearly $60bn of US imports. Washington is set to levy another 10 per cent in duties on $300bn of Chinese imports in the coming months.

Meanwhile, Bank of Singapore said in a separate report that trade war escalation and the drag on global growth points to a higher medium-term risk of a weaker yuan and a stronger gold price.

“We revised the 12-month USDCNY [US dollar to Chinese yuan] forecast to 7.20 [from 6.80] and $1,600 [from $1,500] for gold. These revised forecasts assume no deal but also no further trade war escalation although it is entirely possible that President Trump could raise the latest 10 per cent tariffs to 25 per cent at the beginning of 2020,” the Bank of Singapore report said.

“While a weaker CNY would help offset any tariff hit, recent USDCNY fixings – despite crossing above 7.0 – signalled that Chinese authorities are not about to allow a runaway CNY depreciation to damage onshore confidence and add to capital flight pressures,” the report added.

It said that the fallout from the recent depreciation of the yuan, which saw it slip through the key rate barrier of 7 yuan per dollar, had "so far been manageable, as onshore USDCNY turnover volume data suggest it did not come with signs of “panic” CNY selling”.

The breaching of the 7 yuan per dollar rate led to the US Treasury Department formally labelling China as a currency manipulator. The current exchange rate is 7.04 yuan to the dollar.