Looking beyond the panicked China capital flight narrative
Geopolitics affects, indeed drives, capital markets, which in turn affect investor returns. Alongside Donald Trump’s election victory and Brexit, one of the big geopolitical issues of past year has been the ongoing fear of major capital flight from China.
This concern stems from Beijing’s unexpected 2% devaluation of the yuan against the US dollar last August.
A much-overplayed theory centers on worries about China’s economic slowdown that has prompted significant capital flight from the country, which could then, in turn, risk prompting the much-dreaded Chinese “hard landing”. The proponents of this theory argue that the devaluation was misguided, mismanaged and ill-conceived, resulting in a loss of confidence in Chinese assets among both domestic and international investors.
But while there is undeniable evidence – which is being used to support this shaky narrative – to show that China’s foreign-cash reserves have fallen, I believe the story that mass capital flight is taking a strangle-hold on China is way out of kilter with reality.
So, what’s really going on?
Before Beijing’s shock-and-awe devaluation, most people thought the yuan would continue to make gains against the dollar. Against this consensus of thought, Chinese companies were, quite sensibly, capitalizing on ultra-low US interest rates to borrow dollars rather than yuan. But when the opposite happened, quite sensibly again, organizations across China started paying off their greenback debts as a precaution against future foreign-exchange issues.
Also, because firms believed the appreciation of the yuan was a given, Chinese importers were stalling on paying their bills in order to take advantage of the expected positive exchanges. And, at the same time, but on the flip side, buyers of “made in China” products were eager to pay their bills, creating a distortion on the reserves of foreign exchange. This distortion was then corrected with the depreciation of the yuan.
Therefore, it can be reasonably argued that there is not monumental capital flight from China. Instead, the outflow is a logical shift of position to reflect an adjustment in expectations better.
So while the doomsday preppers and bears continue to whip up the all-too-often hysterical narrative over China’s problem of mass capital flight, there is another, more balanced perspective to be taken.
Investors would do well to be remain cautious, as ever, but against this backdrop of exaggerated claims, there could also be reasons to be cheerful – such as the fact that there could be some important buying opportunities.
Indeed, whereas some investors are always discouraged from, or avoid, investing during times of increased uncertainty, the majority of the most successful investors welcome it keenly. This is because it allows them to bolster their wealth portfolios and benefit from lower entry points.