China Macro:Dissecting China’s capital outflows in 2015

How China lost US$513bn FX reserves in 2015…

The chart below shows the breakdown. After netting out US$170bn valuationeffect, the actual US$343bn drop in FX reserves is the result of US$331bninflows from Current Account and US$674bn outflows from Capital Account. Thisreport focuses on Capital Account, using the framework proposed in ourprevious report: What are the channels of China’s capital outflows?

Two drivers of China’s capital flows

China’s capital outflows could be roughly attributed to two drivers:(1) Unwindingof carry trade;(2) Accumulation of foreign assets by Chinese residents. Weestimate that 52% of the US$674bn Capital Account outflows in 2015is due to(1) and the majority of the remainder is due to (2). Compared with 2014, thejump of capital outflows in 2015is largely due to accelerated carry tradeunwinding, especially after the unexpected depreciation on Aug 11, 2015.Meanwhile, historical experiences suggest that the USDCNY is the maindeterminant of China’s capital flows as it affects both the attractiveness of carrytrade position and the incentive for Chinese to hold foreign assets. Therefore,the PBoC will not likely allow sharp RMB depreciation which would trigger largecapital outflows.