China's record capital outflows pile pressure on yuan

Suppose the weakening Chinese economy, rising dollar, and possibility of greater US Tariffs weren't bad enough. In that case, the yuan is now facing an extra downdraft: an influx of capital seeking to invest abroad.

Last year, investors in China sought greater profits elsewhere, leading to a record outflow of wealth.

Government data show that this led to banks' client payments for capital and financial transactions exceeding those for the current account, which mostly concerns trade. That's unprecedented.

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Any further widening of that imbalance is likely to be accompanied by concerns about massive outflows of money, which would undermine Beijing's yuan management and heighten the likelihood of a regulatory crackdown.

The yuan has fallen around 2.8 per cent in the last three months, following the footsteps of all Asian currencies.

This is driven by the dollar's gain following Donald Trump's presidential victory on November 5.

Chinese yuan faces more downdraft

The value of the Chinese yuan fell this month again, marking its lowest point since September 2023.

Bloomberg estimates that local banks in China transferred a record-breaking 1.33 trillion yuan or 182 billion dollars to offshore investment accounts last year.

The fall in foreign direct investment flows, the eagerness of local enterprises to grow overseas, and the flight of capital from local equities have all put pressure on the nation's capital account.

These variables, taken together, have resulted in a rise in dollar demand, more outflows, and more yuan volatility.

(With the inputs from the agencies)