An accurate picture of the scale of capital outflows along with new growth trend is crucial to understanding the extent of CNY depreciation needed and/or the sustainability of the market interventions/controls. Indeed, if policy makers are serious about having a marketdetermined exchange rate regime, the size of the real exchange rate adjustment will be enough at a point when capital outflows are largely financed by current account inflows or stable components of the capital account (FDI and portfolio outflows). On the flip side, if policy makers take a step back from the recent moves towards flexibility, increase their market interventions and implement controls then the scale of capital outflows and the new growth trend will determine the sustainability of such measures.
Financing for capital outflows had been relatively straightforward when China was running very large current account surpluses. CA transactions fell below 8% in mid 2011 and have stayed low (around 5% of GDP including trade mis-invoicing) despite the increase in capital outflows.Weak global demand and competitiveness pressures as well as a push to rebalance growth away from exports to consumption have eroded the current account surplus in recent years.
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David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.
He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.
